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Is that Gift Conditional?

By   Tim McCutcheon

October 17, 2017

Financial statement information should be complete, true and accurate. Achieving that objective can be challenging, especially when a not-for-profit organization (NFP) receives gifts, conditional gifts, and intentions to give that can be difficult to distinguish from one another. But these can have very different financial reporting consequences. Getting it right means breaking down each giving arrangement to its essential elements, carefully considering whether any legal rights and obligations have been created, and applying the appropriate revenue recognition principles in deciding whether or not a contribution should be recorded.

Unconditional Gifts and Promises to Give
FASB Accounting Standards Codification (ASC) 958-605-25 provides guidance on revenue recognition, first by predicating recognition on whether a gift or promise to give is unconditional or conditional (para 7).

  • Unconditional gifts and promises to give must be recognized as revenue when received. In the case of a promise to give, there must be sufficient evidence in the form of verifiable documentation that a promise was made and received (para 8). A communication from a donor that fails to indicate clearly whether it is a promise is nonetheless considered to be an unconditional promise to give if it indicates an unconditional intention to give that is legally enforceable. Legal enforceability refers to the availability of legal remedies, not the donee’s intent to use them (para 9).
  • On the other hand, solicitation materials that include wording such as, “Information to be used for budget purposes only,” or that clearly and explicitly permit donors to rescind their indications that they will give are intentions to give, rather than promises to give, and cannot be reported as contributions (para 10). Absent solicitation materials containing such provisions, a communication from a donor may contain similar qualifiers, such as, “It is my intention to give, subject to my financial ability to do so,” in which case there is no legal enforceability, and the intention cannot be reported as a contribution.

Assuming that a gift or a promise to give has, in fact, been received, donees must determine whether any conditions exist that preclude the contribution from being recognized as revenue.

Conditional Promise to Give: A Definition
The ASC defines Conditional Promise to Give as a promise to give that depends on the occurrence of a specified future and uncertain [italics added] event to bind the promisor. A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote [italics added] (958-605-25-12). 

ASC 958-605-25-11 explains that imposing a condition creates a barrier [italics added] that must be overcome before the recipient has an unconditional right to retain the promised assets. Below are some common examples of conditions, i.e., barriers:

  1. Donor’s challenge grant, under which the donor promises to match all new contributions obtained by the NFP, dollar-for-dollar, up to a maximum of $500,000, during a prescribed time period
  2. Donor’s promise to contribute $150,000 to a school if its students achieve a specified minimum average test score on a standardized examination
  3. Donor’s requirement that the NFP provide an annual report of grant expenditures and programmatic results
  4. Donor’s promise to establish a $750,000 scholarship fund if at least 80 percent of participants in a job-training program will find suitable employment within six months after completion of the program

In which of the above examples does the possibility of not meeting the condition seem to be remote—in other words, in which examples is it certain that the NFP will meet the condition?

In examples a, b, and d, certainty cannot be assured or assumed. Even though an NFP may have a successful track record of fundraising, academic achievement, or job placement, past performance is not a guarantee of future results. In each of these examples, the gifts would be considered conditional promises to give.

Example c depicts a condition which, under normal circumstances, would be considered to have a remote possibility of not being met. A stipulation that an annual report must be provided by the donee to receive subsequent annual payments on a multiyear promise is not a condition if the possibility of not meeting that administrative requirement is remote (958-605-55-16).In this case, the NFP would record the contribution.

Because of the uncertainty about whether or not they will be met, certain conditions may cast doubt on the determination of the donor’s intent to make a contribution, to make a conditional contribution, or to make no contribution. Accordingly, donor-imposed conditions should be substantially met by the entity before the receipt of assets, including contributions receivable, is recognized as a contribution (958-605-55-15).

Reviewing Facts and Circumstances
When donor communications do not clearly state whether the right to receive payment depends on meeting the specified conditions, or if the conditions are ambiguous, donees should review the facts and circumstances surrounding the gift and communicate with the donor. If the rights and ambiguities cannot be resolved, presume that the promise is a conditional promise to give. 

Transfers of cash or other assets with a condition attached to them are accounted for as refundable advances until the conditions have been substantially met or explicitly waived by the donor. Transfers after a conditional promise to give is made and before the conditions are met are the same as transfers with a conditional promise to contribute (958-605-25-13). A change in the original conditions of the agreement between promisor and promisee cannot be implied without an explicit waiver (958-605-35-2).

When conditional promises to give have been received, recipient organizations must disclose both of the following:

  1. The total of the amounts promised
  2. A description and amount for each group of promises having similar characteristics, such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date (958-605-50-4)

The flowchart below may be helpful in stepping through the process of properly determining when various giving arrangements are or are not recognizable as contribution revenue under generally accepted accounting principles.

Contribution Revenue Recognition