Part 2- Best Practices in Nonprofit Special Events Reporting: Guidelines to Increase Clarity and Consistency
Part 2: Common Pitfalls in Financial Statement Reporting
Direct Donor Benefits Reporting
A common misconception that exists is that direct donor benefits, even when material, do not need to be segregated from fundraising expenses. AICPA Technical Practice Aid TIC 6140.07 states that “certain costs of special fund-raising events, such as costs of direct donor benefits that are provided in exchange transactions, should be reported in categories other than fund-raising.” As discussed above, nonprofits are afforded some degree of flexibility in reporting significant costs of direct donor benefits in the financial statements, as long as they are not reported as fundraising expenses.
For example, let’s assume that ABC Organization held a small charity dinner event in 2015 and sold 100 tickets at $500 a ticket. The fair value of the direct benefits received by each attendee was $250 and it cost ABC $200 per ticket sold. The table below shows three options that ABC would have to report the special events revenue and the costs of direct benefits to donors on its statement of activities: gross special events revenue with a reduction for costs of direct benefits to donors; revenue bifurcated between contributions/special events with a reduction for costs of direct benefits to donors; gross special events revenue with costs of direct benefits to donors reported as a component of expenses.
Revenue Recognition of Future Year Fundraising Events
Another common financial statement reporting error is presenting sponsorships restricted for subsequent year special events improperly as either revenue or liability. Sponsorships in which the donor expects to receive only a de minimis benefit in exchange for the donor’s payment (e.g. donor’s name is published in an event program) should be treated as a refundable advance, assuming the donor’s gift is contingent on the event taking place. Ticket sales for future special events in which the donor is expecting to receive significant benefits in exchange for his/her ticket purchase should be treated as deferred revenue. When a donor explicitly indicates that his/her sponsorship is not contingent on the fundraising event occurring in the following year, the sponsorship is generally recognized as a temporarily restricted contribution, deferred revenue or a combination of both depending on the materiality of direct donor benefits received.
Let’s apply the previous example to this particular issue. ABC Organization holds its major fundraiser in January 2015. Ticket prices are $500 apiece and the fair value of direct benefits received by each attendee is $250. ABC receives a $5,000 general sponsorship in December with Funder A only receiving event admission and his/her name published in the fundraising event materials. Also in December, Funder B sponsors the event for $30,000 and receives 20 tickets to the event in addition to recognition rights. The support of both donors is contingent on the event taking place in 2015.
Because the benefits Funder A will receive are insignificant – event benefits valued at $250 plus the de minimis value of advertisement in the event program – the sponsorship is treated as a refundable advance at December 31, 2014. Funder B, however, is expecting to receive benefits valued at $5,000 (20 tickets with benefits valued at $250 each). This benefit is classified as deferred revenue with the remaining $25,000 recognized as a refundable advance.
Let’s assume the same facts as in the previous example only that both funders explicitly waive the condition that the event must take place. Funder A’s sponsorship of $5,000 would be treated as a temporarily restricted contribution and Funder B’s sponsorship would be split between deferred revenue ($5,000) and temporarily restricted contribution ($25,000). After the event takes place in 2015, the $5,000 in deferred revenue would be recognized as special events revenue and the $30,000 in temporarily restricted net assets would be released from restrictions.
Treatment of Donated Auction Item Sales
Another prevalent misconception is that auction item sales should be recognized as special events revenue. In actuality, they should be recognized as contributions on the financial statements with any differences between the items’ value and the proceeds generated at auction adjusted against contribution revenue. Let’s look at an example. Assume that for ABC’s 2015 fundraiser it received a donation of an all-expenses-paid cruise to the Caribbean islands valued at $10,000. The required journal entry would be:
At the fundraising event, the cruise was auctioned off for $12,000. The journal entry would be:
Suppose that the auction proceeds were only $7,500. The associated journal entry would be:
Improper Adherence to Matching Principle
Expenses paid for a future year fundraiser are typically expensed as period costs. The matching principle under GAAP would suggest that such expenses should be classified as assets similar to how sponsorships for future year fundraisers are generally reported as liabilities at year-end. However, the matching principle does not apply under FASB ASC 958-720-25-4, which states that “fund-raising costs that are incurred in one period and will result in contributions in future periods should be expensed as incurred.”
Failure to Report Joint Costs Related to Special Events
Many nonprofits fail to report special event expenses having both a fundraising and a programmatic element as joint costs. Under FASB ASC 958-720-45-29:55 (formerly AICPA SOP 98-2), expenses [including special events] having a programmatic component should be classified as joint costs and disclosed in the financial statement footnotes. Certain criteria must be met for the expenses to be considered joint costs, including the purpose, audience, and content criteria, but these conditions generally may be satisfied if the event includes an audience call to action.
 the exception to this general rule is if costs relate to assets purchased or costs incurred for the benefit of donors. In this case, the expense is considered incurred when the assets are used or otherwise exhausted.