What is a Promise to Give?

Promise to Give

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Promise to Give

A “Promise to Give” in accounting refers to an unconditional promise made by a donor to contribute cash or other assets to an organization at a future date. These are commonly seen in the non-profit sector, where they’re also referred to as “pledges”. They can be considered a form of receivable and are recognized as assets and revenue when the promise is made, even though the cash or other assets have not yet been received.

There are two types of promises to give:

  • Unconditional Promises: These are pledges where there’s no condition associated with the promise. They are recorded as an asset and revenue by the nonprofit when the promise is made.
  • Conditional Promises: These are pledges where the donor has set some kind of stipulation or condition that must be met before the funds are provided. They are not recognized as an asset or revenue until the conditions are substantially met.

For example, if a donor pledges to give a non-profit organization $10,000 next year with no conditions attached, that is an unconditional promise to give. The non-profit would record a $10,000 pledge receivable and $10,000 of revenue when the promise is made. If the donor pledges the same amount but only if the non-profit raises an additional $10,000 from other sources, that is a conditional promise to give. The non-profit would not recognize the pledge or the revenue until the condition has been met (i.e., the additional funds have been raised).

A “Promise to Give” should be recorded at the fair value of the promised assets. If the promise is to be received in future years, it must be discounted to reflect the present value.

Example of a Promise to Give

Let’s take an example from the world of non-profit organizations.

Suppose a philanthropist pledges to give $50,000 to a non-profit organization, “Health Charity Inc.”, that works on health initiatives. The donation is to be made in five equal installments over the next five years, with no conditions attached. This is an example of an unconditional “Promise to Give”.

When the pledge is made, Health Charity Inc. will record it in its accounting system. Assuming a discount rate of 5% to account for the time value of money, the present value of the donation is approximately $43,590.

So, at the time of the pledge, Health Charity Inc. will make the following journal entries:

  • Debit (increase) Pledges Receivable for $43,590
  • Credit (increase) Contribution Revenue for $43,590

This reflects the fact that Health Charity Inc. has an asset (the pledge receivable) and has also earned revenue, even though no cash has been received yet.

Then, each year as the donor makes their $10,000 donation, Health Charity Inc. would record:

  • Debit (increase) Cash for $10,000
  • Credit (decrease) Pledges Receivable for the portion of the $10,000 that represents repayment of the pledge principle
  • Credit (increase) Contribution Revenue for the portion of the $10,000 that represents the discount unwinding

These entries would be repeated each year as the donations are received. By the end of the five years, the entire $50,000 would have been received and the Pledges Receivable account would be zero. Also, over the course of the five years, a total of $50,000 in Contribution Revenue would be recognized.

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