Policy on Recording Pledges
Background
A pledge is a promise, either written or verbal, to make a contribution at a later date. In 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, that set down firm guidelines for pledge accounting.
Determining What Pledges Should be Recorded
Written or Verbal: Only written pledges may be recorded for financial statement purposes. Written pledges must include the amount of the pledge, a defined payment schedule or due date, a designation if applicable, and signature of the donor. E-mail correspondence will be considered as meeting the signature requirement.
Conditional or Unconditional: Pledges are considered to be conditional if the donor has made their contribution contingent upon some future event. For example, a donor might promise to give $1,000 if the University obtains a matching gift of $2,000 from other sources. Under 116, only unconditional pledges may be recorded in the financial statements when the pledge is made. There may be instances in which a donor may impose a condition that is virtually certain to be met such as "I will give you $1 million provided you give me a report on how the money is spent." Since the probability is remote that the University would risk $1 million by not giving the donor a report, this would not be considered conditional and could be booked as a pledge.
Revocable and Irrevocable Gifts: Many donors make planned gifts through their wills (bequests), living trusts, life insurance and other revocable arrangements that become irrevocable only at the donor's death. Accounting standards do not allow revocable gifts to be booked as pledges.
Donor Advised Funds: A Donor Advised Fund (DAF) is treated like a public charity, so an individual who uses a DAF as a giving vehicle receives a charitable tax deduction at the time that personal assets are transferred to the DAF. The funds are then controlled by the DAF, not by the individual. This means that an individual who gives through a DAF cannot make a legally binding commitment on behalf of the DAF. Therefore, money coming from a DAF cannot be booked as a pledge. It should also be noted that a gift from a DAF cannot be used to pay down a donor's pledge. A donor who plans on giving to the University through a DAF can sign a "non-binding gift intention" but this will not be booked as a pledge on the University's financial statements. If it comes to the attention of University Relations that a donor intends to pay down their personal pledge with a DAF, then the finance office should be notified so that the pledge can be written off for financial statement purposes.
Restricted or Unrestricted: Any pledges that are designated for current year WAF will not be recorded. Under the premise that WAF is an annual drive, if the pledge has not been received as of June 30th (year end) it is reasonable to assume that the pledge is uncollectible. All other designations will be included in the pledge schedule.
Minimum Threshold: No pledges under $25,000 will be recorded for materiality purposes.
Procedures for Recording Pledges
Rather than recording new pledges and tracking pledge payments made against the receivable throughout the year, these entries are done once a year at year end. After June 30th, University Relations has each of their Relationship Managers review all outstanding pledges to determine collectibility. Once the listing of pledges has been finalized, it is sent to the Manager of Restricted Funds in the Finance Office.
The list is then reviewed to determine which pledges are new versus carry-forward and which pledges meet the minimum threshold. For any pledges that meet the minimum threshold and are considered to be new, the Manager of Restricted Funds will request the supporting documentation from University Relations to ensure that all proper signatures are secured and to make sure there are no conditions surrounding the pledge. The Manager of Restricted Funds will then complete the pledge roll-forward for any previously booked pledges, noting whether or not they have been paid, written off or reallocated to a different purpose. This must be done on a pledge by pledge basis.
All pledges are considered to be restricted regardless of their designation once received. The restriction is based upon time. Recording pledges as unrestricted revenue may lead financial statement users to conclude incorrectly that these funds are currently available. Once the pledge is received, the revenue is then considered to be "released from restriction." Pledges whose ultimate designation are for the endowment will be recorded as permanently restricted revenue. All other designations are recorded as temporarily restricted revenue.
Calculation of the Allowance for Uncollectible Pledges
The University books a 10% allowance for uncollectible pledges on the entire pledge receivable balance. This 10% is calculated on the book value amount.
Calculation of the Discounted Pledge Amount
Pledges must be sorted as to the year in which we expect to receive payment. Because pledges represent payments to be made in future periods, the present value of the future income must be determined before recording pledges in the financial statements.
Discount rates will be based upon the 3 year t-bill rate in effect in the year of the gift. The historical data rates can be found at www.federalreserve.gov.