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SFAS No 116 does require recipients (and donors) of pledges payable beyond the current accounting period to discount the pledges to their PV, using an appropriate rate of interest Thus, the ability to receive $1,000 two years later is really only equivalent to receiving about $900 (assuming about a ve percent rate of interest) now, because the $900 could be invested and earn $100 of interest over the two years The higher the interest rate used, the lower will be the PV of the pledge, since the lower amount would earn more interest at the higher rate and still be worth the full $1,000 two years hence The appropriate rate of interest to use in discounting pledges will be a matter of some judgment In many cases, it will be the average rate the organization is currently earning on its investments or its idle cash If the organization is being forced to borrow money to keep going, then the borrowing rate should be used Additional guidance is in SFAS No 116 and APB No 21 As the time passes between the initial recording of a discounted pledge and its eventual collection, the PV increases since the time left before payment is shorter Therefore, the discount element must be gradually accreted up to par (collection) value This accretion should be recorded each year until the due date for the pledge arrives The accretion is recorded as contribution income (This treatment differs from that speci ed in APB No 21 for business debts for which the accretion is recorded as interest income) PLEDGES FOR EXTENDED PERIODS There is one limitation to the general rule that pledges be recorded as assets Occasionally, donors will indicate that they will make an open-ended pledge of support for an extended period of time For example, if a donor promises to pay $5,000 a year for 20 years, would it be appropriate to record as an asset the full 20 years pledge In most cases, no; this would distort the nancial statements Most organizations follow the practice of not recording pledges for future years support beyond a fairly short period They feel that long-term open-ended pledges are inherently conditional on the donor s continued willingness to continue making payments and thus are harder to collect These arguments have validity, and organizations should consider very carefully the likelihood of collection before recording pledges for support in future periods beyond ve years ALLOWANCE FOR UNCOLLECTIBLE PLEDGES Not all pledges will be collected People lose interest in an organization; their personal nancial circumstances may change; they may move out of town This is as true for charities as for businesses, but businesses will usually sue to collect unpaid debts; charities usually will not Thus another important question is how large the allowance for uncollectible pledges should be Most organizations have past experience to help answer this question If over the years, 10 percent of pledges are not collected, then unless the economic climate changes, 10 percent is probably the right gure to use RECOGNITION AS INCOME The second, related question is: When should a pledge be recognized as income This used to be a complicated question, requiring many pages of discussion in earlier editions of this Handbook Now, the answer is easy: immediately upon receipt of an unconditional pledge This is the same rule that applies to all kinds of gifts under SFAS No 116 Conditional pledges are not recorded until the condition is met, at which time they are effectively unconditional pledges Footnote disclosure of unrecorded conditional pledges should be made Under the earlier Audit Guides/SOP, pledges without purpose restrictions were recorded in the unrestricted fund Only if the pledge has a purpose restriction would it be recorded in a restricted fund Even pledges with explicit time restrictions were still recorded in the unrestricted fund, to re ect the exibility of use that would exist when the pledge was collected Under SFAS No 116, all pledges are considered implicitly time-restricted, by virtue of their being unavailable for use until collected Additionally, time-restricted gifts, including all pledges, are now reported in the temporarily restricted class of net assets They are then reclassi ed to the unrestricted class when the speci ed time arrives This means that even a pledge not payable for 10 years or a pledge payable in many installments is recorded as revenue in full (less the discount to PV) in the temporarily restricted class in the
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