ASC 958 Not-for-Profit Entities: Unconditional Promise to Give Transaction Explained with Journal Entries

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Not-for-profit entities operate in a unique environment, relying heavily on contributions and grants to fund their mission and activities. One of the primary revenue sources for these organizations is the unconditional promise to give, which is governed by the ASC 958 accounting standard. In this article, we will delve into the accounting treatment for unconditional promises to give, providing examples of journal entries to help not-for-profit entities accurately record these transactions.

 

Understanding Unconditional Promises to Give

An unconditional promise to give is a commitment made by a donor to contribute a specific amount to a not-for-profit entity without any conditions or contingencies. These promises can be either restricted or unrestricted, depending on whether the donor specifies how the funds should be used.

 

Accounting for Unconditional Promises to Give

According to ASC 958, not-for-profit entities should record unconditional promises to give as revenue at the fair value of the promise when it is received. The fair value is typically the present value of the expected future cash flows, taking into consideration the time value of money and any credit risk associated with the donor.

 

Journal Entries for Unconditional Promises to Give

To illustrate the accounting treatment for an unconditional promise to give, consider the following example:

 

A not-for-profit entity receives an unconditional promise to give $10,000 from a donor. The promise is to be paid in two equal installments over the next two years, and the not-for-profit entity determines the fair value of the promise to be $9,200, based on a discount rate of 5%.

 

Journal entries for the not-for-profit entity would include:
 

  1. At the time of receiving the unconditional promise to give:
     

            Dr. Pledges Receivable (Asset) $9,200

            Cr. Contribution Revenue $9,200

            (To record the unconditional promise to give at its fair value)

 

  1. At the end of each year, to record the discount on the pledges receivable:
     

            Dr. Discount on Pledges Receivable (Contra-Asset) $230

            Cr. Contribution Revenue $230

            (To record the annual amortization of the discount on the pledges receivable)

 

  1. When the not-for-profit entity receives the cash payment:
     

            Dr. Cash $5,000

            Cr. Pledges Receivable $4,615

            Cr. Discount on Pledges Receivable $385

    (To record the cash receipt and reduce the pledges receivable and discount on pledges receivable)

 

Unconditional promises to give are a critical source of revenue for not-for-profit entities. By accurately recording these transactions in accordance with ASC 958, organizations can ensure proper financial reporting and maintain the trust of their donors and other stakeholders. Understanding and applying the appropriate accounting treatment for these transactions is essential for not-for-profit entities to successfully fulfill their mission and maintain financial transparency.