CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesHard
A not-for-profit research institution received a pledge of $500,000 from a major pharmaceutical company. The pledge is unconditional and is expected to be collected in two equal installments over the next two years. The fair value of the pledge, discounted to present value, is $475,000. How should this unconditional pledge be recognized in the Statement of Activities in the year it is made?
- A$500,000 as contribution revenue without donor restrictions.
- B$475,000 as contribution revenue with donor restrictions (time restriction).
- C$475,000 as contribution revenue without donor restrictions.
- D$500,000 as contribution revenue with donor restrictions (time restriction).
Show answer & explanationAnswer & explanation
Correct answer: B. $475,000 as contribution revenue with donor restrictions (time restriction).
Unconditional pledges expected to be collected in future periods are recognized at their present value. Since the collection is expected over two years, there is an implicit time restriction imposed by the donor, even if not explicitly stated, classifying it as net assets with donor restrictions.
Why the other options are wrong
- A. Incorrect. The pledge is time-restricted, and it should be recognized at present value.
- C. Incorrect, as the future collection implies a time restriction, and thus it is with donor restrictions.
- D. Incorrect. The pledge should be recognized at its present value, not its face value.
Unconditional Pledge Recognition
An unconditional promise to give (pledge) is recognized as contribution revenue in the period the promise is made. If the pledge is due in a future period, it is considered time-restricted and recorded at its present value.
- Recognized as revenue when made if unconditional.
- Pledges due in future periods are time-restricted.
- Recorded at present value for future pledges.
- Discount is amortized over the collection period.
Memory trick: Pledge now, discount future, restrict by time.