Accounting for Capital Campaigns
Congratulations! Your nonprofit organization has determined that a capital campaign is feasible and in your future. What are some accounting rules to keep in mind when setting up the campaign? Continue reading to find out more.
Pre-capital campaign work – It is better to be prepared than to ask for forgiveness later. This includes ensuring the proper language is on the pledge cards that will be distributed.
Sufficient documentation for a pledge should include the donor’s name, address, and telephone number; amount of the promise; date of the promise and due date(s); type of assets to be received; and any conditions/restrictions placed on the contribution.
There are two scenarios to consider in preparation of the pledge card. What if the project does not receive full funding? If the funds are fully restricted for a certain purpose and the purpose does not occur, communication with the donor will be needed to change the purpose restriction, or to determine if the funds can be used for general operations. This can be time consuming for the Organization. To alleviate this situation, a statement could be added to indicate, “if the purpose of the capital campaign cannot be realized the funding will be used for ________ (general operations, another project, etc.).” Some donors will not agree to give money with this statement and may cross it out, but several donors will complete it making any subsequent communication more manageable.
Also consider what will happen to any additional funding over your goal. An easy solution would be to add the following disclaimer, “ABC Organization will use contributions for the designated project, but any contributions received in excess of the amount needed for the designated project will be used for ___________ (or at the discretion of the organization).”
During the campaign – The pledge cards are being returned and the goal thermometer is rising. What is the proper way to record all these pledges? All unconditional pledges are recorded as revenue in the year pledged. This revenue will be classified as temporarily restricted for a specified purpose (the reason for your capital campaign, unless a statement that the contributions are unrestricted is included in your marketing). If you do not have donor tracking software, a spreadsheet should be maintained to keep track of when the pledges are due and the amounts for future use. Pledges that are expected to be collected within one year are measured at net realizable value, defined as the nondiscounted amount of cash expected to be collected. Further discussions and calculations must occur if the asset is noncash and are beyond the scope of this article.
Pledges that are due one year or more in the future are recorded at the present value of future cash flows. There are two ways to determine the present value: the discount rate adjustment technique and the expected present value technique. These techniques differ in how they adjust for risk and should be evaluated prior to selecting a method. Essentially, either technique will take into account that a dollar today is worth more than a dollar at a future date.
For all pledges, the amount recorded should also be reduced by the amount not expected to be collected. Usually determined as a percentage of the total pledges, this can be determined using historical collection rates of similar fundraising efforts within the Organization or similar organizations. For example, similar capital campaigns in the region for similar purposes may yield a collection rate of 90%. The Organization determines they expect similar results; your total pledges of $500,000 would be recorded as $450,000. The amount should be regularly reevaluated as donors indicate they are unable to pay or as collections exceed original expectations.
After the campaign – At each predetermined due date for pledges, pledge payment reminders should be sent out to contributors to assist in collection. If any pledges are deemed to be uncollectible, they should be written off. Allowances should also be analyzed on a regular basis and adjusted as necessary.
Do not forget to include the required tax disclosure that states that no goods or services were received in exchange for your contribution on thank you letters sent out after receiving the pledge cards back.
As each campaign is unique, there are variables on when restrictions will be released. Further analysis is required on a case-to-case basis.
This article is a brief summary of accounting concepts that must be considered with a capital campaign, further analysis may be necessary. Please contact one of our non-profit experts for help.