Donor commitments are the core element of most capital campaigns, but not all pledges are created equal.
Understanding the differences, and how they impact their accounting treatment, is key to financial accuracy.
Types of Donor Commitments
Unconditional promises to give
Binding commitments recorded as assets and revenue when made. Common buzzwords associated with unconditional promises to give include “I promise to give, “I pledge,” and “I will give”.
Intentions to give
Non-binding statements of support, not recorded until converted to a formal pledge or cash. Common buzzwords associated with intentions include “I intend to give, “I plan to give,” and “I may give”.
Conditional promises
Pledges tied to specific requirements (for example, matching gifts, groundbreaking events) that are recorded only once the condition is met. Conditional promises to give contain many of the same buzzwords as unconditional promises to give but also include an “if” afterwards followed by the requirement to be completed.
Discounting Multi-Year Pledges
If a donor pledges $100,000 over five years, that is the equivalent of pledging a lesser amount today since $100,000 in year five has less purchasing power than $100,000 today. Accounting standards require nonprofits to discount long-term pledges to their present value, usually using U.S. Treasury rates plus a small risk adjustment. This ensures financial statements reflect the true value of commitments at the time they are made.
Planning for Defaults
It’s also smart (and generally required by accounting guidance) to plan for the reality that some pledges may never be fulfilled. Creating an allowance for uncollectible pledges (often 5–15% of the total) helps account for overcommitted donors or unexpected financial changes. Factors to base the percentage on include previous experience with pledge campaigns, industry benchmarks, donor demographics, and pledge duration.
Set Your Nonprofit Up for Success
As stated earlier, not all pledges are created equal. However, understanding their differences will help you manage risk and present a true financial picture. Campaigns can be setup to be more “intention to give” or “promise to give” focused, but that determination should be made at the beginning when pledge forms are being designed. Planning for uncollectible pledges and discounting long-term gifts are small steps that can prevent major surprises later. In Part 3, we’ll look at how to properly categorize campaign expenses and assets to reflect accurate financial records. Read Part 1 of the Capital Campaigns series: Keep Your Finances Organized from Day One. Looking for more guidance? Get in touch with our nonprofit advisors to talk about your upcoming capital campaign and how we can help!
