The difference between financial pledges and donations is relatively simple: Pledges are promises to donate sometime in the future, and donations provide immediate support for your not-for-profit organization. What’s not so simple is accounting for pledges. After all, a promise to donate isn’t a guarantee that you’ll receive the money when the contributor says you will — if at all — or in the amount pledged.
Unconditional is a Green Light
Let’s say a donor makes a pledge in September 2024 to contribute $10,000 in January 2025. You generally will create a pledge receivable and recognize the revenue for the September 2024 financial period. When you receive the donation in January 2025, you’ll apply it to the receivable. No new revenue will result in January because the revenue already will have been recorded.
However, you can’t recognize the revenue unless the donor has made a firm commitment and the pledge is unconditional. This means the donor has committed to the pledge without reservations. Several factors might indicate an unconditional pledge, for example, if the promise includes a fixed payment schedule or the amount can be determined. Unconditional promises also typically include words such as “promise,” “pledge,” “binding” and “agree” — as opposed to “plan,” “intend” and “hope.”
Conditional Promises
What about conditional promises? They could include a requirement that your organization complete a particular project before receiving the contribution or that you send a representative to an event to receive the check in person. Matching pledges are conditional until the matching requirement is satisfied, and bequests are conditional until after the donor’s death.
You generally shouldn’t recognize revenue on conditional promises until the conditions have been met. Recording a conditional pledge could be acceptable if the odds of a condition going unfulfilled are remote. Say, for example, that a donor makes a pledge with a condition that your nonprofit still exists in five years. If your organization has been in a solid financial position for 10 years and has no plans to close, you’ll probably be able to satisfy this condition.
Support and Recognize Promises
Whether a pledge is conditional or unconditional, your accounting department will need written documentation to support a pledge before recording it. The strongest evidence is a signed agreement with the donor that details the pledge’s terms, including the amount and timing. If pledges come up often, you might want to develop a standard pledge template to use with all pledge donors. (Note that reluctance to sign such an agreement could be reason to question a donor’s commitment, and you might not want to record the pledge.)
To reflect the time value of money, pledges must be recorded at their present value, as opposed to the amounts your nonprofit expects to receive in the future. For pledges you’ll receive within a year, you can recognize the pledged amount as the present value.
If a pledge will be received further in the future, though, present value is calculated by applying a discount rate to the amount your organization is expected to receive. The discount rate is usually the market interest rate — or the rate a bank would charge you to borrow the amount of the pledge. Additional entries will be required to remove the discount as time elapses.
Your Fundraising Strategy
It’s understandable if your organization prefers outright donations to pledges. But pledges can play a valuable role in your fundraising strategy because they’re generally for larger amounts. Also, donors tend to have longer relationships with nonprofits to which they pledge. Contact our Not-for-Profit specialists for advice about accounting for pledges properly.