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A Nonprofit’s Guide to Understanding and Accounting for Multiyear Pledges

For a nonprofit organization, securing multiyear pledges can be extremely helpful to organizations that are looking to increase their financial stability, or help serve as a significant resource for capital or mission-based projects. While these types of pledges provide more clarity for funding, they can create an extra layer of accounting processes to make sure that organizations remain in compliance with generally accepted accounting principles (GAAP). Below, we’ll give an overview of multiyear pledges, how they are initially recorded, and provide some best practices on how to identify and track them throughout the pledge’s life.

Exactly What Are Multiyear Pledges?

For the reasons stated above, multiyear pledges are highly sought after by nonprofits. They are created when a donor commits to contributing a specified amount of money to a nonprofit organization over several years. For organizations, these pledges look to offer a steady stream of revenue, allowing them to dream big and plan for the future. It is not uncommon for future receipts to be dependent on the organization meeting certain conditions or agreeing to adhere to certain restrictions.

Key Characteristics of Multiyear Pledges: Conditions, Restrictions, and When to Recognize

It is imperative that management identifies and understands the nature of the pledge at the time of commitment from the donor, as it will serve as the initial direction in how to record in the organization’s accounting records. The key characteristics include determining:

If Pledge is Conditional vs. Unconditional: Some pledges come with strings attached, requiring the organization to meet specific conditions before the funds are released. Others are unconditional, with no requirements other than the commitment from the donor.
If Pledge is Time-Restricted: Multiyear pledges are committed over a specific period, instead of receiving all funds in one fiscal period.
When the Pledge is Recorded as Revenue: According to GAAP, these pledges are recorded as revenue in the year of commitment. This is where many organizations mistakenly record only the amount of the pledge received each year (if unconditional). For organizations maintaining their accounting records on a GAAP basis, this is where tracking the period the promise is made and when funds are received becomes vital.

Common Sources of Multiyear Pledges

Nonprofit organizations aim to generate multiyear pledges by seeking one or more of the following sources:

1. Capital Campaigns:

– Organizations look to raise funds for significant projects, hoping donors will share in the vision and commit funding for use on the specified project.

2. Endowment Contributions:

– Donors contribute over time to grow funds that support the organization, with the goal of the donations providing future sustainable funding for operations and programs.

3. Program Funding:

– Donors may commit to multiyear pledges to support ongoing programs or initiatives (i.e. scholarships, research projects), providing a stable funding source over time.

4. Grant Agreements:

– Foundations and governmental bodies may provide multiyear grants, but they often come with conditions.

Identifying and Tracking Multiyear Pledges Throughout the Fiscal Year

As mentioned, understanding the nature of the pledge at the time of commitment is key in determining how to implement proper accounting. With the right procedures and strategies, nonprofits can manage multiyear pledges effectively. The following procedures are crucial in tracking them from the start:

1. Initial Identification:

– Review Donor Agreements: Nonprofits must carefully review the terms, conditions, and timelines of pledges.

– Verify Donor Intent: Determine if the pledge is conditional or unconditional, and whether any restrictions apply.

2. Recordkeeping:

– Recognition of Revenue: If unconditional, record the entire pledge amount as revenue in the period of the promise.

– Disclosure in Financial Statements: Ensure that the details of the pledge are disclose, to adhere to GAAP and also provide much needed transparency to your current and potential donors.

3. Monitoring and Collection:

– Systematic Tracking: Use accounting software to track the arrival of pledge payments over time.

– Regular Reviews: Review outstanding pledges regularly which helps the organization identify funds that are scheduled to come (or later to arrive).

4. Communication and Engagement:

– Donor Relations: Maintain regular communication with donors, thanking them for their pledges and updating them on the impact of their donations.

– Acknowledge Payments: Prompt acknowledgment of each installment reinforces engagement and goodwill.

5. Reporting and Analysis:

– Budgeting and Forecasting: Incorporate multiyear pledges into budgets and cash flow forecasts to align strategic goals with current financial standing of the organization.

– Impact Assessment: Analyze how pledged funds contribute to achieving organizational objectives, so donors know their giving creates an impact.

In the nonprofit world, securing multiyear pledges can feel challenging, but when obtained helps to create much sought after financial stability and expanded ability to strategically plan for longer-term missions and projects.

By understanding multiyear pledges, maintaining accurate records, and engaging with donors effectively, nonprofits can alleviate some of the challenges that come with accounting for and seeking out these types of pledges.

At Sassetti, we have experienced personnel dedicated to supporting nonprofit organizations. Hopefully, with the help of some of the information above, your organization can implement effective systems to track and report multiyear pledges, allowing you to focus on mission-driven activities.

Author: Shawn Carter