Question

We Shelter, a nongovernmental not-for-profit organization, received a generous pledge of $1,000,000. Under which of the following donor stipulations will the pledge not be recognized in the current financial statements?

a. The donor stipulates that the pledge will not be paid in the current fiscal year but will be paid in the next fiscal year.
b. The donor stipulates that We Shelter must use the pledge to expand the existing facility.
c. All of these donor stipulations would result in the pledge not being recognized in the current year.
d. The donor stipulates that We Shelter must use the pledge to increase the existing facility to accommodate an additional 500 animals, and the donor is released from the pledge obligation if the stipulation is not met.

Answer 1

The correct answer is that a pledge with conditions that have not yet been met, such as option d, would not be recognized in the current financial statements. Option c is technically incorrect; recognition depends on the timing and whether conditions are attached to the pledge. Options a and b would still allow for the pledge to be recognized, unless further stipulations make such pledges conditional.

Step-by-step explanation:

Regarding the recognition of a pledge from a donor in the current financial statements of We Shelter, a nongovernmental not-for-profit organization, the conditions specified by the donor will determine when the pledge can be recognized as revenue. According to generally accepted accounting principles (GAAP), a pledge must be recognized when it is received, unless donor restrictions apply that prevent such recognition.

If a donor stipulates that a pledge should not be paid in the current fiscal year (option a), it would still be recognized in the current financial statements as a receivable, and revenue would be deferred. However, if a donor stipulates that We Shelter must use the pledge to meet a specific condition - such as expanding the existing facility (option b) or increasing the facility's capacity by 500 animals, with a condition that the donor is released from the pledge if the stipulation is not met (option d) - there is a conditional promise which relies on the occurrence of a specified future and uncertain event. In this case, according to GAAP, the pledge would not be recognized in the current financial statements. Conditional pledges are recorded as liabilities or are not recognized at all until the conditions are substantially met.

Therefore, the correct answer to the student's question would be option c: All of these donor stipulations would result in the pledge not being recognized in the current year. However, to be precise and based on the given information, only option d should lead to the non-recognition of the pledge. Both options a and b would still result in a recognition, unless there are additional undisclosed stipulations that make the pledges conditional.