By Raffi Yousefian | 12/29/2019
It’s that time of the year when gala contributions, sponsorships, and ticket sales start rolling in. Nonprofit organizations sell tickets, sponsorships, and other “ticket packages” that give a donor an exclusive table with 10 tickets. Your accountant sees these transactions, and asks, how should we code the revenue? Your answer: You tell me… how should I code the revenue?
Accounting for sponsorships is a conversation for another day, but lets discuss how we should account for ticket sales for that end-of-year gala.
Exchange vs Contribution
First, ticket sales or table packages need to be split between exchange transactions and contributions. Exchange transactions are revenue in which a donor receives something in return for the donation. In the case of a gala, a donor receives a nice meal, as if they are going to a restaurant. Assume you sell tickets to a gala for $100/person, but the “street” value of the meal provided is only $55/person. $55 of this $100 ticket is assumed to be an exchange transaction. The “upcharge”, or $45 in this case, is considered a contribution or donation. However, you must wait until the event is over, and track how many ticketholders attended the event. If the ticketholder didn’t attend the event, the entire amount for that ticket is considered a contribution. For example, if a donor purchases 10 tickets, but only 6 guests attend, the exchange portion of the transaction is $330 ($55 x 6 guests), and the contribution portion is $670 ($45 X 6 guests + $100 x 4 guests). You’re required to provide the exchange and contribution value for each ticket to the donor, because they’re allowed to deduct only the contribution portion on their personal tax returns. This is a lot of work, so you need to make sure to use the appropriate tools to track ticket sales and attendance. Your accountant should be provided with this information after the event, and they will (should) know what to do.
The cost of the direct benefits should be tracked separately from other event expenses. If you’re hosting galas or other special events, then Cost of Direct Benefits account should be added to your chart of accounts. These are the expenses or costs directly attributable to providing the product or service to the donor. For example, cost of the meals and beverages provided, facility, and decorations would all be included in Cost of Direct Benefits. Other expenses such as public relations, marketing, employee time, etc. are not Cost of Direct Benefits, and can be tracked like other fundraising expenses using the appropriate expense accounts.
If your gala is an incidental event, you can report all the ticket revenue net of direct expenses on your Statement of Activity. However, for 990 purposes, the variables discussed above need to be broken out regardless of whether the event is incidental or not. There are the three options to achieve this on your Statement of Activity:
- Gross ticket sales including the contribution portion will appear in the Special Event Gross Revenue account. Cost of Direct Benefits will appear in the revenue section as a separate line item under your Special Event Gross Revenue account. Fundraising expenses will be recorded like any other fundraising expenses in the appropriate accounts.
- Gross ticket sales including the contribution portion will appear in the Special Event Gross Revenue account. Cost of Direct Benefits will appear separately in the expenses section of your Statement of Activity like other expense accounts. Fundraising expenses will be recorded like any other fundraising expenses in the appropriate accounts.
- The exchange portion of the ticket sales will appear in the Special Event Gross Revenue account. Contributions attributable to ticket sales will be recorded like any other donation or contribution on your Statement of Activity. Cost of Direct Benefits will appear in the revenue section as a separate line item under your Special Event Gross Revenue account. Fundraising expenses will be recorded like any other fundraising expenses in the appropriate accounts.
The third option is my favorite because it provides the distinct information needed to prepare the 990 and GAAP audited financial statements directly on the Statement of Activity.
Now that we know how to recognize gala revenue, we need to determine when to recognize. If the gala ticket is conditioned upon the event occurring, the revenue is not recognized until the event occurs. Therefore, a liability or deferred revenue will be recorded on the books for the amounts received, instead of recording revenue. Once the event occurs, the revenue is recognized, and the liability is reduced to zero. If the organization will receive the funds regardless of the gala occurring (aka nonrefundable), the revenue is recognized upon receipt of the funds.
There are many variables involved with recording special event or gala revenue. The key is to set up your reporting and procedures to streamline the process and have all the information you need for 990 and GAAP compliance in a timely manner. Please feel free to contact us if you have any questions.