Five donors have pledged 1 million dollars each over the next four years to Lucky Duck University. With this in mind, answer the following questions:
At what point should these pledges be recognized as revenue?
The University is often a non-profit organization that receives a relatively high percentage of its funding from donors. Therefore, the procedure for accounting and reporting of income obtained in this form is a matter of special importance for such organizations. The pledge is a promise to give in the future, which raises the question of whether and at what point it can be recognized as revenue for the company. The pledge can be recognized as revenue on the date it is made if it meets a particular requirement. The main requirement established by the Statement of Financial Accounting Standards No. 116 is that the pledge must be unconditional.
This norm means that the promise to contribute is not conditioned by a “future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets transferred” (Financial Accounting Standards Board, 1993, p. 6). The terms of the assignment do not state anything about the conditions set by the donors.
Thus, the answer depends on the conditions under which the donors made the pledge. If uncertain future event conditions the promise, then pledges can only be “recognized when they become unconditional, that is, when the conditions are substantially met” (FASB, 1993, p. 4). If no conditions have been agreed, the Lucky Duck University may recognize these pledges as revenue in the year they are received.
How should the revenue be valued?
The same logic applies to the answer to the second question. According to Barragato, “non-profit organizations recognize unconditional promises to give as assets and revenues in the year promises are received as mandated by Statement of Financial Accounting Standards (SFAS) No. 116” (2019, p. 190). If all donors’ pledges are unconditioned, the revenue should be valued at 20 million dollars, the full amount of all pledges.
If the promises are conditional upon the occurrence of an uncertain event, revenue can only be measured when that event occurs. Supposing that four donors made unconditional promises, and the fifth pledged 1 million dollars each over the next four years in case the Lucky Duck University takes a particular line in the ranking. Therefore, the revenue in the year the pledges are received can be estimated at 18 million dollars. The remaining 4 million dollars can only be recognized as revenue when the university meets the requirement above.
How should these pledges be reported as a change in net assets, and in which net assets class should they be reported?
There are three types of net asset classes that need to be distinguished in the report. The fact is that the donor may impose restrictions on the use of funds. That being the case, this restriction should be reflected in the report. The Statement of Financial Accounting Standards No. 116 requires to “distinguish between contributions received with permanent restrictions, those received with temporary restrictions, and those received without donor-imposed restrictions” (FASB, 1993, p. 7).
The terms of the assignment do not state anything about any restrictions imposed on the use of contributed assets. Thus, it should be assumed that there are no such restrictions, and the funds should be reported as unrestricted net assets. If it were stated, for instance, that one donor has pledged contributions for the university to use them to raise in the ranking, then these funds should be reported as temporarily restricted net assets. That being said, when the university meets this condition and takes the specified line in the rating, the funds will be considered unrestricted net assets.
References
Barragato, C. A. (2019). The impact of accounting regulation on non-profit revenue recognition. Journal of Applied Accounting Research. 20(2), 190-206.
Financial Accounting Standards Board. (1993). Statement of financial accounting standards no. 116. Norwalk, CT: Author.