DISCOUNT ON UNCONDITIONAL PROMISES TO GIVE

By Kimberly Canup, CPA - Senior Accountant

Not-for-profit organizations can receive both unconditional and conditional promises to give. An unconditional promise to give is a one in which the donor voluntarily offers to transfer an asset (or cancel a liability) without consideration. A conditional promise to give differs from the unconditional promise in that the donor's ultimate transfer of the asset (or cancellation of a liability) is dependent on the occurrence or nonoccurrence of a future, uncertain event prior to the culmination of the transfer. This article will focus on unconditional promises only.

Recognition of the amount of a donor's unconditional promise is triggered by the transfer of an economic benefit - the receipt of either the contribution or a promise to make a contribution in the future. Such promises should be recognized at fair value (as revenue and a receivable) when the promise is received, even if the promise will not be fulfilled until a future period. To clarify, a donor can promise to give a certain amount of money each year for the next "x" number of years or promise to give a lump sum amount of money by a specified time in the future. In either case, the fair value of that promise is recorded at the time the promise is made. The complicating factor is that promises anticipated to be collected more than one year from the date the promise is made require the amount to be recorded at the fair value of the promise to give. Additionally, these amounts should be based on projected future cash receipts that are discounted using rates that are "commensurate with the risks involved."

In calculating the fair value of unconditional promises to give, the following factors should be considered:

• When the promise is expected to be collected.
• The donor's creditworthiness.
• Past collection experience.
• The organization's policy on enforcing promises to give.
• The uncertainty inherent in the cash flows (i.e., possible variations in the amount and timing of the cash flows).
• Any other relevant factor concerning the receivable's collectability.

Please see FASB ASC 820 for additional discussion of the above topic. For further information or assistance calculating the present value of unconditional promises to give, please contact your Blue & Co. advisor.