How to Account for Nonprofit Contributions
Contributions are one of the most significant sources of revenue that nonprofit organizations have available to accomplish their programs and fulfill their mission. Contributions can be received in many different forms, usually in the form of financial assets or nonfinancial assets. For the purposes of this article, we are going to focus on contributions of financial assets: cash, stocks, bonds, etc.
Fundraising Appeals
At the most basic level of contributions, an organization makes an appeal to support one or more of its programs or the overall purpose of the organization. As an example, an organization may administer an annual appeal around the holidays for which a mailing will be sent to pervious donors or a specific geographic area. This mailing will detail accomplishments of the organization and provide the opportunity to support the organization via financial means. Donations may be designated (restricted) to a specific program or purpose or may allow for a general donation, which affords the organization the opportunity to use the funds as they see fit. The accounting over these transactions is relatively straight forward; the organization receives cash and recognizes revenue.
Promises to Give
What happens if the organization is looking to expand its operations or is in need of a new office or warehouse? What if a donor wants to provide major support but cannot budget for a single major outlay? Large donations can be common, and while some are fortunate to make a large donation all at once, there are many donors that wish to make a big impact but would prefer to make several smaller donations over time. This is the concept of making a pledge to support an organization. Pledges, or promises to give, help provide these donors with the opportunity to make a large impact over time and also provides the organization with known longer term cash flows.
Accounting for Pledges
Pledges or promises to give are commitments to transfer cash or other financial assets to an organization at a specified date or over a specified term. An organization should recognize the full amount of the contribution when the pledge is made, regardless of when the ultimate cash collection will occur. Many of these pledge agreements extend beyond one year and are categorized as long-term receivables on an organization’s statement of financial position. Due to the timing between a donor making the promise to give and fulfilling the promise, long-term pledges are reported at fair value; that is, adjusted for the time value of money.
The concept of the time value of money sounds a lot more daunting than it is. In simple terms, a dollar today is worth more than a dollar tomorrow due to earnings potential if that dollar was invested. When a long-term pledge is received, the amount is initially recorded at its fair value by discounting the amount by a selected interest rate (typically the risk-free rate) plus a risk premium to factor in credit risk and uncertainty. Subsequent measurements are needed throughout the collection period of these pledges with adjustments to write up this discount as time passes.
Excel is a great tool to summarize pledges receivable over multiple years and calculate the present value. Let’s look at an example on how to use Excel’s PV function to discount pledges.
NFP-A receives unconditional promises to give that amount to $1,000,000 and are collectible over the next 5 years in equal increments, or $200,000 per year. The pledges were all made on 1/2/2024. Risk-free rates for 1, 2, 3, and 4 years are 4.80%, 4.33%. 4.09%, and 4.01%, respectively (obtained from the U.S. Department of the Treasury’s daily yield curves as of 1/2/2024; 4 year is an average of 3-year and 5-year rates). For this example, we will add 1.00% for risk premium. In Excel, we can setup the following:
| A | B | C | D | E | |
| 1 | Year | Discount period | Amount receivable | Discount rate | Present Value |
| 2 | 2024 | 0 |
$ 200,000 |
N/A | $ 200,000 |
| 3 | 2025 | 1 |
200,000 |
5.80% |
189,036 |
| 4 | 2026 | 2 |
200,000 |
5.33% |
180,271 |
| 5 | 2027 | 3 |
200,000 |
5.09% |
172,324 |
| 6 | 2028 | 4 |
200,000 |
5.01% |
164,478 |
| 7 |
$ 1,000,000 |
$ 906,109 |
The formula used in Excel is PV (Present Value) and can be found under the “Formulas” ribbon and selected from the “Financial” dropdown. Here the user can simply click on the cells that have information needed. Conversely, the user can also type in the formula and fill in the needed information. The formula can be brought up by typing into a cell “=PV”, without quotes, and the syntax is: =PV(rate,nper,pmt,[fv],[type]).
Rate: Interest or discount rate (Column D in the example)
Nper: Periods to discount (Column B in the example)
Pmt: An unchanging payment stream made each period. This does not get used in this situation.
FV: An optional variable; however, the amounts in Column C are cash basis and would be the future value that we are discounting back to today’s dollar.
Type: This tells the formula whether the payments are made at the beginning or end of the period. The default is to make payments at the end of a period and is left blank.
Given this, our formula starting in Cell E3 would be =PV(D3,B3,,C3). This formula can be copied to the cells below to achieve the present value for each year. Note that we are not discounting those amounts collectible within the current year as the cash value of these is the fair value.
As presented above, at the inception of the promises to give, the statement of financial position would show pledges receivable of $1,000,000 and a discount on pledges of $93,891; effectively showing pledges receivable, net, as $906,109 or the discounted pledges receivable.
At each interim reporting and/or year end, this would be evaluated again using the same methodology with changes in the discount rate to adjust for the change in the time value of money. Those amounts that are due within one year or less are reported undiscounted. Additionally, for financial reporting purposes, these amounts would be split between current and non-current with current being the amounts expected to be received within one year of the statement of financial position date.
Discounting pledges receivable more accurately reflects the true value of a contribution and allows an organization to better manage its cash flow over time.
If you have questions about the information outlined above, please contact us, our seasoned and experienced nonprofit professionals are here to help. You can also learn more about our nonprofit services by visiting our Nonprofit industry page.
