In the not-for-profit industry, contributions are often the lifeblood of an organization. Therefore it is essential that an organization optimize and capitalize on any potential development opportunities. Frequently, an organization receives only a promise from a donor to make a contribution at some future time and place. Does this promise have an accounting effect?
At first glance, it appears that no real transaction has taken place. Generally, revenue is recognized by an organization when an exchange transaction has occurred. In most cases, an exchange transaction occurs when an organization performs or delivers goods to a customer.
However, a contribution is not an ordinary exchange transaction. A contribution is generally a conferment of an economic benefit on an organization with little, if any, value given in return. Since a contribution lacks the characteristics of an ordinary exchange transaction, the accounting treatment of a contribution for nonprofit organizations is unique. Contributions are recognized as revenue or gains in the period of receipt or in the period when the promise to give is made.
The recognition of promises to give depends on the character of the promise made. An organization must first determine if the promise to give is unconditional or conditional. A promise to give is unconditional if it indicates an unconditional intention to give that is legally enforceable. An example of an unconditional promise is an award letter that announces a donor's intention to contribute a specific amount of money at a specific time. A promise to give is conditional if the receipt of the contribution depends upon the occurrence of a future event.
An example of a conditional promise is an award letter that announces a donor's intention to make a contribution, but is subject to the donor realizing a net operating profit in the current year.
Depending on whether the promise is unconditional or conditional, promises to give must be recognized as revenue in the period in which the promise is received by an organization. Unconditional promises are recognized as revenue when received. Conditional promises are recognized as revenue only when the conditions upon which they depend are substantially met. In the aforementioned example, the organization may find that the condition is substantially met shortly after the donor's year end operating results are released that indicate a net operating profit has in fact been achieved.
In either scenario, an organization should ensure that, prior to recognizing contribution revenue, it has obtained “sufficient evidence in the form of verifiable documentation that a promise was made and received,” in accordance with generally accepted accounting principles. The availability of documentation is an important factor in determining the legitimacy of a donor's commitment to follow through on a promise.
However, not all promises to give must be reduced to writing. Mere oral agreements also qualify as promises to give. However, an organization should evaluate more factors when considering whether to recognize oral promises, including the donor's relationship with the organization, past promises made by the donor, and the circumstances in which the oral promise was made.
When a promise to give is recognized as revenue, the organization should record a contribution receivable for the same amount. Generally, the organization should record the receivable at the stated amount of the promise. However, for promises to give that are expected to be received beyond one year of the financial statement date, an organization must value the receivable at the present value of the stated amount promised at the date the donor made the promise.
In addition, an organization should periodically evaluate its contributions receivable for any uncertainty as to whether the receivables are fully collectible. Especially considering the current economic environment, an evaluation of receivables is an important process in accurately measuring the financial position of an organization at a given point in time. To illustrate the difficulties that contributors are experiencing, according to the American Bankruptcy Institute’s Annual Business and Non-Business Filings by State, there were 2,466 business bankruptcy filings in the State of Illinois in 2009. This figure increased approximately 58% from 2008 and more than doubled the 2007 figure.
An organization must record an allowance for uncollectible receivables if both of the following conditions are met: (1) it is probable that receivables recorded at the financial statement date will not be collected and (2) the uncollectible amount can be reasonably estimated. Management may base its estimate on the organization’s past experience, a donor's ability to pay, or an overall evaluation of current economic conditions. While an allowance is often viewed negatively from a financial reporting standpoint, a properly estimated allowance ought to match bad debt expense with its related contribution income. Periodic monitoring of allowances allows an organization to more meaningfully project and even budget bad debt expense for a given fiscal year. This puts the organization in a more informed position, so that significant losses in years of higher donor defaults do not take anyone by surprise.
By Michael West, CPA, Supervising Senior, mwest@legacycpas.com
Sources: FASB ASC 310-10-05-4; 310-10-25-10; FASB ASC 310-10-35-7; FASB ASC 310-10-35-10