For many nonprofits, the last few years have been characterized by virtual and hybrid fundraising efforts. As organizations, donors, volunteers, and the world in general adjust to feeling comfortable gathering again, more nonprofits are expected to return their focus to in-person events. It has become increasingly important for nonprofits to understand how to account for special events under the new revenue recognition standards.
Differentiating Contributions & Exchange Transactions
In 2018, the Financial Accounting Standards Board issued accounting standards update (ASU) 2018-08, which changed the way nonprofits account for revenue for special events. Suppose you sell tickets to a fundraising gala for $75 each that includes a buffet dinner. You have calculated the catering, after any discounts, to be $20 per-person for the meal; however, the per-person fair market value of each meal is $35. Because that portion of the sale constitutes an exchange transaction determined at fair market value, $35 from the sale of each ticket is recorded as revenue; and the remaining $40 is recorded as a contribution.
A corporate sponsorship qualifies as a contribution if it is a “true charitable contribution,” not a payment made for advertising. According to the IRS, advertising includes broadcasting or otherwise transmitting, publishing, displaying or distributing any message or other programming material promoting or marketing any business, facility, trade, service, or product. Advertising also includes “messages containing qualitative or comparative language, price information, or other indications of savings or value associated with a product or service, an endorsement or an inducement to purchase, sell, or use the sponsor’s company, service, facility or product.”
Does including a logo on print materials count as advertising? Often, nonprofit organizations include sponsors’ names, logos, and slogans on event programs, brochures or other fundraising materials. Including this information in print material is considered a form of acknowledgment rather than advertising, and in this case, is a qualified sponsorship. If you promote a sponsor’s products or services, however, it counts as an exchange transaction, and your organization could be subject to unrelated business income tax (UBIT).
When you provide your donors with documentation of the tax-deductible portion of the ticket price or event sponsorship, your good faith estimate of the market value of the benefits they received is required.
Special Event Revenue Recognition
Revenue recognition is deferred if a contribution depends upon the event taking place. The receipt must be recognized as a liability, or deferred revenue, on the statement of financial position. After the event takes place and the donor receives the related benefits, then the portion of the payment that is an exchange transaction is recognized. Using the example above, you would record $35 from each ticket as revenue, as long as the event takes place before the end of the reporting period. If it does not, the exchange portion of the payment is classified as a liability or deferred revenue.
If the donor explicitly waives the requirement that the event take place, then you can recognize the contribution as revenue before the event or regardless of whether it actually happens.
In general, fundraising expenses do not result in a direct benefit for the donors. These include general expenses, such as event management, printing promotional materials, or renting equipment. If you hold an event and do not charge attendees a fee, unless the cost of the donor benefits relates to your program services, you would record the cost under fundraising expenses. When an exchange transaction occurs, the related costs result in a direct benefit to donors. In this case, the cost is reported separately, usually as cost of sales or cost of direct benefits to donors.
Reporting Special Event Revenue & Expenses on Your Statement of Activities
Your organization needs to determine whether the revenue and expenses from the special event are considered to be an integral and ongoing activity of an organization. In other words, it must be an event that supports your mission and programming. If so, you must report the revenue and expenses at gross on your statement of activities in your financial statements. If the revenue and expense from the event are incidental, you may report the net amount.
While Generally Accepted Accounting Principles require nonprofits to report the revenue and expenses for a fundraising event on the financial statements as special event revenue, for tax purposes, the IRS’s reporting requirements can differ. For Form 990 purposes, nonprofits report the revenue and expenses as either contributions or special event revenue. It’s important for nonprofits to understand the differences in GAAP and tax reporting to comply with their financial statement and tax reporting responsibilities.
Contact Smith, Sullivan & Brown
At SSB, we understand the unique challenges nonprofit organizations face today, including the intricacies of fundraising. Accounting for special event revenue can be complex, but we’re here to help. If you’d like to learn more, contact Linda Smith or Juliana Caruso today.
by Linda Smith, CPA & Juliana Caruso, CPA, MBA
Linda Smith is SSB’s Managing Partner. She graduated summa cum laude from Bentley College in 1986 and became Certified as a Public Accountant in 1990. Linda actively participates in audit field work and manages the firm’s nonprofit accounting, auditing, and tax services.
Juliana Caruso is a Senior Audit Manager at SSB and specializes in nonprofit auditing services. She holds a bachelor’s degree from University of Virginia and a Master of Science in Accounting and Business Administration from Northeastern University. Juliana became a Certified Public Accountant in 2009.