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7.3 Unconditional promises to give cash
Publication date: 30 Apr 2022
us NFP guide
Sometimes a donor will make a binding promise to provide resources to an NFP at a future date. In such cases, benefits transfer from the donor to the donee when the promise is made, not when the promised resources are ultimately transferred.
Guidance on the unique recognition and measurement considerations associated with these gifts is located in the following ASC Topics:
Donors (makers of promises) |
Donees (recipients of promises) |
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Chapter 5 of the AAG-NFP contains extensive commentary, discussion, and examples applicable to recipients of promises. AAG-NFP 10.91 through AAG-NFP 10.95 and AAG-NFP 13.28 through AAG-NFP 13.33 contain similar discussions related to makers of promises.
7.3.1 What is a promise to give?
An unconditional promise to give is an agreement to contribute cash or other assets to another entity that contains no barriers or hurdles that the donee must overcome to be entitled to the resources (i.e., conditions). Its fulfillment depends only on the passage of time or the donee’s demand for performance.
Definitions from ASC Master Glossary
Promise to give: A written or oral agreement to contribute cash or other assets to another entity. A promise carries rights and obligations—the recipient of a promise to give has a right to expect that the promised assets will be transferred in the future, and the maker has a social and moral obligation, and generally a legal obligation, to make the promised transfer. A promise to give may be either conditional or unconditional.
Unconditional promise to give: A promise to give that depends only on passage of time or demand by the promisee for performance.
ASC 958-605-25-8 through ASC 958-605-25-10 provide the recognition principles for unconditional promises to give. These principles address the various elements of a promise to give, including considerations for distinguishing between intentions to give and promises to give (NP 7.3.1.1) and the evidence required to indicate a promise has been made (NP 7.3.1.2).
7.3.1.1 Elements of a promise to give—rights and obligations/enforceability
In order for a promise to give to be recognized, it must contain rights and obligations—the recipient of a promise to give has a right to expect that the promised assets will be transferred in the future, and the maker has a social and moral obligation, and generally a legal obligation, to make the promised transfer. For accounting purposes, unambiguous promises to give do not require a determination as to whether they are legally enforceable.
Promises to give are generally legally enforceable, but this determination may require judgment if the donor communication is ambiguous. In part, this is due to the fact that laws governing the legal enforceability of pledges vary by state and may rest on whether there was consideration exchanged (such as the naming of a building or recognition in the annual fundraising report) or whether the NFP relied on the promise under the theory of promissory estoppel or detrimental reliance. In BC 97 to FAS 116, Accounting for Contributions Received and Made (the original FASB Statement underpinning ASC 958-605), the FASB articulated that donors/promisors may have equitable or constructive obligations to pay, even though the promise lacks legal sanction.
Distinguishing between an intention and a promise to give
An intention to give does not contain enforceable rights and obligations, and, therefore, is not a promise to give; however, distinguishing between an intention and a promise can require significant judgment. ASC 958-605-25-9 states that a communication that does not indicate clearly whether it is a promise can be considered an unconditional promise only if it indicates an unconditional intention to give that is legally enforceable. That is, a lack of clarity in the donor documentation as to whether it is a promise requires a determination as to legal enforceability. This could be the case, for example, when a potential donor articulates an amount and intended purpose of a donation but also states that the agreement is not legally binding. We believe that all of the facts and circumstances—the nature of the solicitation to the donor, discussions with the donor prior to the agreement, publicity about the donor action (e.g., a press release issued by the NFP and/or the donor announcing the pledge), or actions taken by the NFP in reliance on the donor commitment (if any)—should be considered when determining whether there has been a promise to give that warrants recognition for accounting purposes.
ASC 958-605-25-9 also states that legal enforceability refers to the availability of legal remedies, not merely the recipient entity’s intent (or lack thereof) to use them. Assertions by an NFP that it would not enforce a promise does not preclude recognition of that promise as a contribution; the only question is whether the legal remedy to enforce the promise exists.
Some NFPs receive communications from donors that indicate an intention to give, rather than a promise to give. For example, some “pledge cards” that allow individuals to indicate an amount they hope to be able to give to a faith-based organization during a specified period might be non-binding. Because they are not binding commitments, intentions to give are not considered promises to give and do not give rise to either a contribution receivable (for the recipient) or contribution payable (for the maker).
7.3.1.2 Elements of a promise to give—documentation
Another element for recognition of promises to give is documentation. ASC 958-605-55-18 through ASC 958-605-55-19 state that a promise can be written or oral; however, verifiable documentation supporting the promise must exist. Written documentation in the form of a signed binding pledge card or other written correspondence would typically provide sufficient evidence of a promise. If a promise is made orally, a recording of a telephone or other conversation, or a written log of promises made orally that are verifiable would generally suffice.
7.3.2 Donee’s accounting for promises to give cash
Under ASC 958-310-25-1, unconditional promises are reported as receivables and as contribution income in the period the promise is received and measured at fair value on the date the promise was made. If the initial gift was a conditional promise, fair value is measured on the date the condition is met (that is, when the promise becomes unconditional).
An unconditional promise to give shall be recognized as revenue or gain in the period received and as an asset in accordance with paragraphs 958-605-25-7 through 25-15.
7.3.2.1 Promises due in less than one year
ASC 958-310-35-3 indicates that a promise that will be collected within one year can be measured at its net realizable value, because that amount represents a reasonable estimate of fair value. That means that the donee should assess whether the contribution is reasonably assured of collection, and only recognizes the amount that it estimates will be collected, less direct costs of collection, if any. If the promise is still outstanding at the end of the fiscal year, net realizable value would be updated to reflect any changes, if necessary.
7.3.2.2 Promises due in more than one year
The present value of the future cash flows (an “income approach” under ASC 820) is the valuation technique typically used when measuring the fair value of a contribution due more than one year from the date of the promise. AAG-NFP 5.181 indicates that no market exists for promises to give cash. Because no observable market exists, the donee must make suppositions about the assumptions market participants would use in deciding what to pay for the right to receive the cash flows inherent in the promise.
In developing expectations related to future cash flows, ASC 958-605-30-4 states that the NFP would consider factors associated with the receivable’s collectability (such as the donor’s creditworthiness, the NFP’s past collection experience, and the NFP’s policies concerning the enforcement of promises to give), as well as the possibility that the donor could make payments at times other than the scheduled dates.
The future cash flows are discounted to reflect the time value of money. The assumptions used in selecting a discount rate should be consistent with the assumptions inherent in the cash flows. For example, if probability-weighted cash flows are used, a discount rate that reflects uncertainty in expectations about future defaults should not be used, because the cash flows already reflect assumptions about the uncertainty of future defaults. Under ASC 958-605-30-5, unless an NFP has elected the fair value option, the discount rate is established when the unconditional promise to give is initially recognized and not revised subsequently.
The discount rate shall be determined at the time the unconditional promise to give is initially recognized and shall not be revised subsequently unless the entity has elected to measure the promise to give at fair value in conformity with the Fair Value Option Subsections of Subtopic 825-10.
Example NP 7-1 is derived from ASC 958-605-55-22 and illustrates the use of a present value technique for initial recognition and measurement of unconditional promises to give cash that are expected to be collected after more than one year.
EXAMPLE NP 7-1
Initial recognition of unconditional promises to give cash
Initial recognition of unconditional promises to give cash
An NFP receives a promise of a gift of $100 to be paid in five years. The anticipated future cash flows from the promise are $70, and the present value of the future cash flows is $50. How should the NFP record the contribution receivable and revenue using a present value technique to measure fair value?
Analysis
The NFP would record the following entry:
Dr. Contribution receivable
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$70
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Cr. Contribution revenue – donor-restricted
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$50
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Cr. Discount on contribution receivable
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$20
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Note that because expectations related to collectability are considered in initial measurement, the amount initially recognized for the contribution receivable is less than the gross amount promised.
Subsequent to initial recognition, contributions receivable are reported at amortized cost, unless the NFP has elected subsequent fair value measurement of the receivable under ASC 825-10 (refer to NP 7.3.4). According to AAG-NFP 5.193, this is similar to accounting for trade receivables due in one year or more. If the expectation of uncollectibility of the cash flows increases (and thus, the NFP believes the expected future cash flows will be lower than initially estimated), it would establish an allowance for uncollectible receivables. Note that the allowance for uncollectible contributions receivable only includes amounts determined to be uncollectible after initial recognition; it does not include the amounts that were determined to be uncollectible in the initial measurement process as stated in ASC 958-310-50-2. Downward revisions in the initial expectation of collectability are reported as a loss or an expense (bad debt) corresponding to the appropriate net asset class. According to ASC 958-310-45-3, because expenses may only be reported in net assets without donor restriction, uncollectible amounts should be reported as losses if they are decreases in net assets with donor restriction. Since most contributions receivable are donor-restricted because of the implied time restriction (see NP 6.7.1), revisions in the initial expectation of collectibility of contributions receivable should be reported as losses rather than expenses.
Unless the NFP has elected subsequent fair value measurement under ASC 825-10, the discount computed at initial recognition is not revised to reflect market conditions at each measurement date. Instead, it is amortized over the receivable’s scheduled term, typically using the interest method, as described in ASC 835-30-35-2, although AAG-NFP 5.195 indicates that other methods could also be used if the results are not materially different. ASC 958-310-35-6 requires the increase in the receivable due to the interest amortization to be reported as additional contribution income (rather than as interest income). The increase in the carrying amount of the receivable increases the net asset class in which the promise was originally reported.
7.3.2.3 Implied time restrictions on promises to give cash
Contribution revenue arising from unconditional promises to give with payments due in future years will normally increase donor-restricted net assets, even if the donor imposes no explicit time or purpose restrictions. By agreeing to a future payment date (or a schedule of future payment dates), donors implicitly indicate that the gift is to support activities of the period in which payment is scheduled. Therefore, as discussed in NP 6.7.1, a time restriction is implicit in all promises to give with payments due in future periods, unless the donor explicitly states that the gift is to support current activities or other circumstances clearly point to that intent. AAG-NFP 5.95 and AAG-NFP 5.96 provide examples of when a time restriction is not implied on promises to give.
The implied time restriction (or a portion of the implied time restriction) expires as the future payment or payments come due. If there are no other time or purpose restrictions, a reclassification from net assets with donor restrictions to net assets without donor restrictions is made when the implied time restriction expires. If other donor restrictions have been imposed (for example, the gift must be used for a specific purpose), the reclassification is reported in the period in which the last remaining restriction expires, as discussed at NP 6.7.2.4 and in Example NP 6-13.
Promises that are due within the same reporting period that they are made have no implicit time restriction. The associated contribution revenue is reported as an increase in net assets without donor restrictions unless other time or purpose restrictions are imposed by the donor.
7.3.3 Donor’s accounting for promises to give cash
ASC 720-25-25-1 requires that the donor report unconditional promises as contributions payable and as contribution expense in the period the promise is made, measured as described in ASC 720-25-30-1.
Contributions made shall be recognized as expenses in the period made and as decreases of assets or increases of liabilities depending on the form of the benefits given. For example, gifts of items from inventory held for sale are recognized as decreases of inventory and contribution expenses, and unconditional promises to give cash are recognized as payables and contribution expenses.
Contributions made shall be measured at the fair values of the assets given or, if made in the form of a settlement or cancellation of a donee's liabilities, at the fair value of the liabilities cancelled.
As noted in NP 7.3.2, no market exists for unconditional promises to give cash. Therefore, the approach discussed for fair value measurement of the receivable (i.e., the present value of future cash flows) is typically applied to determine the fair value of the contribution payable. Similarly, promises that are expected to be paid in less than one year can be measured using net settlement value (the counterpart to net realizable value).
If a present value measurement technique is used, a multi-year promise to give would be initially measured at its discounted value (i.e., an amount less than the notional amount of the pledge). The discount rate determined at the time the promise is initially recognized should not be revised unless the promise is subsequently remeasured at fair value pursuant to the fair value option (discussed at NP 7.3.4). The interest method is used to amortize the discount. Similar to the donee’s accounting, the increase in the liability due to amortization of the interest is reported as additional contribution expense (rather than as interest expense) and included in the same functional expense classification in which the promise was originally reported.
Question NP 7-2 distinguishes promises to give from other gifts of contractual rights to receive cash.
Question NP 7-2
An NFP received a gift of a paid-up cash value life insurance policy in which the NFP was given ownership of the policy and named as sole beneficiary. The policy will pay $1 million to the NFP upon the death of the donor. Is this a promise to give $1 million in cash to the NFP upon the death of the donor (i.e., a death-contingent pledge)?
An NFP received a gift of a paid-up cash value life insurance policy in which the NFP was given ownership of the policy and named as sole beneficiary. The policy will pay $1 million to the NFP upon the death of the donor. Is this a promise to give $1 million in cash to the NFP upon the death of the donor (i.e., a death-contingent pledge)?
PwC response
This would not be considered a promise to give cash to the NFP in a future period. Rather, the NFP has received a noncash gift of an insurance contract (i.e., a financial asset). The NFP would recognize the financial asset at its fair value on the date of the gift (which is likely to be the cash surrender value).
7.3.4 Electing the fair value option for unconditional promises to give cash
For contributions receivable or payable that meet the definition of a financial instrument (such as promises to give cash or other financial assets), donors and donees can elect to subsequently measure them at fair value pursuant to the fair value option under ASC 825-10. This election must be made at the point of initial recognition and is irrevocable for the life of the asset or liability. If fair value is determined using a discounted cash flow valuation technique, the entity would update the estimated cash flows and the discount rate assumptions to reflect current market conditions at each measurement date, pursuant to the guidance in ASC 958-310-35-1, and all of the changes would be reflected together as an adjustment to fair value. For further information on use of the fair value option for financial instruments, see FV 6.
7.3.5 Presentation and disclosure of promises to give cash
In the donee’s balance sheet, contributions receivable that are reported at amortized cost are displayed net of any unamortized discount and the allowance for uncollectible promises. The discount should be separately disclosed on the face of the balance sheet or in the notes to the financial statements, pursuant to ASC 958-310-45-1. In the donee’s statement of activities, losses (or expenses) associated with uncollectible pledges should not be netted against contribution revenue unless contribution revenues are considered peripheral and incidental activity, as discussed in AICPA Technical Questions and Answers (TQA) 6140.09, Reporting Bad Debt Losses. Per ASC 958-310-50-1, notes to the recipient’s financial statements should disclose:
- a schedule of contributions receivable showing the total amount receivable within one year, in one to five years, and in more than five years, and
- the amount of the allowance for uncollectible promises receivable arising from subsequent decreases due to changes in the quantity or nature of assets expected to be received.
NFP donors such as foundations must provide a schedule of unconditional promises to give that shows the total amount separated into amounts payable in each of the next five years, the aggregate amount due in more than five years, and the unamortized discount for unconditional promises to give reported using a present value technique, in accordance with ASC 958-405-50. ASC 450-20-50, which provides guidance for disclosure of loss contingencies, should be followed to evaluate whether conditional promises made should be disclosed.
See ASC 958-310-50-3 for the disclosures required for unconditional promises when the fair value option has been elected.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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