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Do You Know What a Pledge Really is?

Most nonprofit organizations are familiar with pledges, as people, businesses, and foundations make promises to give in the future. Many times these promises are the results of fundraising campaigns or appeals. Depending on the situation, the pledge could be for a general or specific purpose, such as for a new child-care program.

Pledges, both short and long-term, may be shown as “Pledges” or “Unconditional Promises to Give” on the Statement of Position.

Promises to give may or may not be real. For example, if a person notifies an organization that he is including the nonprofit in his will, this isn’t a pledge. The same situation exists if someone promises to pay a certain amount twenty years in the future—it’s not a pledge. In both cases, donors can easily change their minds; circumstances can change, making the promises hard to keep.

  • Promises to give must have no conditions to be recognized as real pledges.

Note that  conditions are different from restrictions:

  • Conditions determine if the amount will be given or not
  • Restrictions determine how to use the proceeds

Suppose there is a condition associated with a pledge — the money will be given only if a relative recovers from a serious disease. In this situation, the nonprofit records the pledge only after the condition is met, that is, the person recovers. This situation is tricky since a lot can change, and it makes good sense not to recognize this promise until it’s paid. Same if the condition is the occurrence of a major disaster in California— this pledge is conditional, and the nonprofit should not record it. Once a disaster hits California, then the pledge may be valid.  Managers should use common sense here.

Another example of a condition is a company matching donations made by employees. If an employee gives $10, the firm would also pay $10, matching the donor’s amount. As the employee donates, the condition on the firm’s pledge is lifted. Therefore, each time an employee pays, the organization recognizes a matching pledge.

The wording of a pledge is crucial to determine when a promise is conditional or just restricted. The key word in conditional pledges is “if.” Those are usually not recorded as real pledges by the nonprofit, although they may be filed for future follow up.

Once a pledge is determined to be valid, it can be unrestricted or restricted to a particular time or event, such as for a reading program happening in the future. The classification depends on donors’ intentions. A pledge made on a general appeal can be safely assumed to be unrestricted, while others specific to an individual program should be considered restricted.

Organizations must have pledge documents in writing whenever possible. If a donor doesn’t want to acknowledge the pledge, a thank you letter confirming the gift is a good idea. The letter can be simple and brief but should leave no doubt about the existence of the pledge and its intent.

Issues usually associated with pledges are collectability, pledges paid in installments and privacy of donors, all discussed next.

Collectability

As promises are to give in the future, pledges may not be all collectible, and most organizations aren’t going to sue to collect promised amounts because of PR issues. Therefore, by its nature, pledges are riskier than regular accounts receivable. As expected, a pledge due in a year is less risky than another one due in two or more years since a lot can happen in a year or longer.  Fundraising staff usually follow up on promises to pay, diplomatically, of course.

Due to the risk of default on pledges receivable, an Allowance for Uncollectible Pledges account is employed. It may be created and adjusted every year based on history. If an organization experiences 15 percent in uncollectible pledges, for instance, this percentage may be applied. It’s the same concept as the Allowance for Uncollectible Receivables in the for-profit world.

A strange situation with promises to give has popped up recently with a young, wealthy supporter promising to give a significant amount to an organization. As expected, people got excited, made a public PR deal with the pledge and started planning how to spend the money. Low-and-behold — it was all fake. The guy liked the attention, but was not wealthy and had no intention to fulfill the promise. The organization lost a lot of credibility with this deal. So, I recommend that nonprofits set up policies and procedures to evaluate significant pledges and to refrain from announcing it and making plans for it until all checks out.

Installments

Besides lump sum promises, nonprofits could also have pledges payable in installments; for example, a commitment of $25,000 payable at $5,000 a year for five years. In this case, organizations are to discount the payments to present value using a reasonable percentage. The discount is amortized as in the for-profit world. FASB ASC 820-10 (FASB 157) relates to this topic to be sure organizations evaluate pledges in a fair and acceptable manner.

  • Government and other grants aren’t considered to be pledges and are presented separately in financial statements.

So, if an organization receives a pledge of $30,000 payable in 5 years, apart is considered to be current pledge receivable, and the rest is non-current. In addition, revenue is recognized along with a discount and the allowance account. Don’t double count pledges – once as revenue when the promise is made and again when payments are made.

Privacy

Many times big donors want to keep their donations and personal information private. To this end, nonprofits should implement proper care so that the donor is acknowledged, donations are recorded, and the donor’s identity is kept secret. So, to assure privacy, donor databases need to be kept secure. Only a few people should possess access to the donors’ records.

As an example, a nonprofit organization I worked with had celebrities donating significant amounts of money, and they didn’t want their names, email addresses or other information available. Therefore, instead of inputting the real names and information in the database, the organization used the names “Anonymous 1,” “Anonymous 2,” etc. The nonprofit kept the real names and personal information under lock and key in a file cabinet accessible only by a couple of people. This low-tech setup worked well.

Note that a pledge is assumed to be a donation, not an exchange, so FASB ASU 2014-09 Revenue from Contracts with Customers doesn’t apply.

 

 

( Excerpt from “Nonprofit Finance A Practical Guide– Second Edition)

Grant Management Ideas

When a nonprofit receives grants, either from government entities or foundations, management needs to keep records well organized for questions or reviews. This can be tricky in the case of multiple funders with their own reporting and compliance issues. Even smaller funders may want to know what happened to their money and require some reporting, even if informal.  Showing disorganization and lack of controls may discourage donors to keep on giving, spelling disaster to nonprofits.

Below are some ideas that are likely to help you in this process.

  • Set up a summary sheet for each grant with reporting dates and other crucial information, such as education requirement of staff covered on each grant that is updated for each new grant and is reviewed every week to make sure nothing falls through the cracks. This could be done on paper or online, but make sure others within the organization have access to this information easily in case people go on vacations or leave the nonprofit. A template could be created so that all summary sheets look alike, making it easy to find information.
  • Make sure the accounting system captures revenues and expenses on each grant. You could identify grants through the chart of accounts by reserving a couple of digits towards specific grants or through “classes” or another method specific to your software. You may also need to train your accounts receivable and payable staff to recognize grant funds coming in and out, so they can code them properly. If not, you will have a nightmarish time providing reports to grantors and other interested parties.
  • Develop a good filing system. Be sure to download and print all OMB Circulars and other documentation relevant to grant control, including notes on meetings and phone conversations. Keep them filed and accessible at all times. You can make a summary listing of all non-allowable costs that you are likely to have and keep it handy.
  • Establish a budget for the organization based on grant budgets. Every grant-funded project should have its own budget numbers entered in your accounting system.
  • Review reports on each project monthly to identify errors and monitor financial compliance.  The Board and upper management usually receive summary reports, but other managers should review financial reports by grant source.
  • Review documentation on journal entries, accounting entries, associated with grants. Each expense and revenue should be justified with proper documentation. If you see a number that doesn’t make sense, ask to see the backup paperwork related to the number.

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award