Question

A foundation promises to donate $1 million to a local public broadcasting station (a not-for-profit organization) in one year. When, and in what amount, should the station recognize revenue? The station applies a discount rate of 10 percent to all pledges. Would your response be the same if the foundation pledged to donate the funds only if and when the station agreed to carry a particular program? Why do many not-for-profits objects to the standards pertaining to revenue recognition of pledges?

Answer 1

The revenue, received upon the pledge receipt should be recognized in a restricted fund and be measured by discounting the estimated future cash flows, to the present value using a risk free rate. Therefore the amount to be recognized by the station is $909091(PVF, 10%, 1year) that is ($1million*0.909091) when it receives the pledge amount. If the amount of pledge is conditional to the carrying of a particular program, being the agreement of Station, and then only on satisfying the condition stipulated, that is carrying of that agreed program, the amount can be recognized as revenue. A lot many not for profit organizations oppose the recognition of pledges as revenue, as the amount will be available to be expensed only upon the receipt of the same. Hence they oppose that entity’s financial statements makes a vague impression of NPO’s having more resources than they actually have.