As many not for profit organizations prepare for their year-end financial audit, it is a good idea to review promises to give before closing the books. Deciding when to recognize a donor’s promise to give as contribution revenue isn’t as easy as one may think. Understanding the different types of promises and general revenue recognition rules for each will help ensure your organization is recording promises to give correctly.
Promises to give can be oral or written agreements by a donor to contribute cash or other assets to an organization. Regardless of whether the promise was made by conversation or in writing, it is very important for the organization to document basic information about the donor and the promise. Such information should include the donor contact information, date the promise was made, description of the gift, amount, and donor restrictions, if applicable. In practice, many of our clients document the receipt of a promise to give by providing an acknowledgment letter to the donor.
Once the promise is received, the next steps include determining the type of promise and when to recognize the revenue. There are three types of promises to give: unconditional promise to give, conditional promise to give, and intention to give.
Unconditional Promise to Give
An unconditional promise to give is a promise whose receipt depends only on the passage of time or the organization’s demand for performance. Accounting rules require that contribution revenue be recognized at the time the unconditional promise to give is received, which often times does not coincide with the receipt of cash or asset from the donor. The contribution revenue also needs to classified as either unrestricted, temporarily restricted, or permanently restricted and recorded at fair value. It is important to consider when the promise is expected to be collected, creditworthiness and past collection experience of the donor in determining the fair value of the promise. It is also important to remember to discount multi-year promises to give, rules on which can be difficult. If your organization has multi-year promises to give, we suggest your organization obtain further consultation.
Conditional Promise to Give
A conditional promise to give occurs when a donor promises to contribute assets to an organization if specified future and uncertain events occur. If there is more than a remote possibility that the donor conditions will not be met, the conditional promise to give should not be recognized as contribution revenue until the conditions are met. However, accounting rules do require disclosure of conditional promises to give in the financial statement footnotes.
Intention to Give
The best way to define an intention to give is by example. The most common example of an intention to give is when an organization learns they are included as a beneficiary in a donor’s will. Because the donor can modify the will during his or her lifetime, the communication represents only an intention to give, not a promise to give. When the donor is deceased and the will is declared valid, the intention to give becomes an unconditional promise to give and recognized as contribution revenue.
The timing of when an organization recognizes contribution revenue from a promise to give can have a material impact on the organization’s financial statements, which is why we suggest organizations take the time to analyze and document all promises to give. As always, if you have any questions or need further guidance on promises to give and revenue recognition, please contact Jenny Ryan at 312.670.7444.
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