Managing Charitable Pledges: Best Practices for Nonprofit Executives

The distinction between pledges and donations is clear: Pledges are commitments to contribute in the future, while donations provide immediate support. However, the accounting treatment for pledges is more complex. Since a pledge does not guarantee payment, your nonprofit must account for these promises accurately.

Accounting for Unconditional Pledges

If a donor commits to a pledge, such as promising $10,000 in September 2024 to be paid in January 2025, your organization can record a pledge receivable and recognize the revenue in September 2024. When the donation is received in January 2025, it will be applied to the receivable, and no additional revenue will be recognized.

Revenue can only be recognized if the pledge is unconditional, meaning the donor has made a firm, binding commitment without any contingencies. Indicators of an unconditional pledge include a fixed payment schedule or specific language such as “promise” or “pledge.”

Handling Conditional Pledges

Conditional pledges, on the other hand, come with stipulations that must be met before the donation can be received. For instance, a donor may require your organization to complete a specific project or attend an event to collect the contribution. Matching gifts and bequests are also considered conditional until their requirements are fulfilled.

Revenue from conditional pledges should not be recognized until the conditions are met, unless the likelihood of non-fulfillment is extremely low. For example, if a donor conditions their pledge on your nonprofit existing in five years, and your organization has a strong track record, this could be considered a reasonable condition to meet.

Documentation and Valuation

Whether pledges are conditional or unconditional, proper documentation is essential. A signed agreement outlining the pledge’s terms, amount, and timing is ideal. Implementing a standard pledge form for donors can help streamline this process. Be cautious of donors unwilling to formalize their pledge in writing, as this could indicate a lack of commitment.

Additionally, pledges must be recorded at their present value to reflect the time value of money. If the pledge is expected to be received within a year, you can recognize the pledged amount as the present value. For longer-term pledges, the present value is calculated by applying a discount rate to the expected amount, requiring adjustments as time progresses.

Integrating Pledges into Your Fundraising Strategy

Although outright donations may seem more desirable, pledges often involve larger sums and establish long-term donor relationships. Properly managing and accounting for pledges can enhance your nonprofit’s financial strategy. Contact us for tailored guidance on handling charitable pledges for your organization.