Special Events' Special Accounting Issues
What is a Special Event?
For nonprofit organizations, a special event can encompass a fundraiser, social, or educational event, or a combination thereof. Special events usually involve elements of fundraising, marketing your Organization, helping potential donors feel connected with your cause, and creating community appeal. When an attendee receives a direct benefit from participating in the event, such as a meal or free gift, the event is considered a special event. Examples of a special event can include dinners, auctions, golf tournaments, bingo, concerts, movie premiers, and educational seminars.
Major versus Peripheral Events
Special events income and expenses have different financial reporting requirements which can lead to different financial statement presentations. According to Generally Accepted Accounting Principles (GAAP), how the special event is accounted for in the financial statements depends on how the special event is categorized. Some events that a nonprofit organization hosts could be categorized as a major event or a peripheral event, but this depends on the organization’s strategies and goals.
Major Events: These types of events would be considered central or ongoing activities for the organization. To be a major event, the following criteria must be met:
- The event is a standard part of the organization’s strategy and is a usual occurrence conducted by the organization, or
- The event’s gross revenues and expenses are a significant part of the organization’s annual budget.
Peripheral/Incidental Events: Events that are not central to the organization’s strategies are peripheral or incidental. To be a peripheral event, the following criteria must be met:
The event is not part of the organization's usual activities.
The event's gross revenues and expenses are not a major part of the organization's annual budget.
Reporting Gross versus Net Amounts on the Financial Statements
Once the special event has been classified as either a major or peripheral event, the next step is to present the event’s financial performance in the financial statements.
Peripheral events can be reported at the net amount of event revenues and expenses in the statement of activities. However, the expenses must only include the direct costs of the event. For example, the direct costs from a fundraising dinner would include the cost of the meal, the rental fees associated with the venue, and promotional costs for the dinner.
Major events must be presented in the financial statements by reporting the total revenues and expenses from the event separately stated. The costs of direct benefits to the donors from the major events can be presented in three different ways. The first way reports the costs of direct benefits as a separate line item that is directly deducted from the special event revenues. For example, a fundraising dinner with 40 attendees that cost the organization $25 for each attendee’s meal but raised $100 per attendee would be reported as follows:
| Revenues: | ||
| Contributions | $5,000 | |
| Fundraising Dinner Revenues | $4,000 | $100 x 40 attendees |
| Less: Direct Benefit Costs (Dinners) | ($1,000) | $25 x 40 attendees |
| Net Revenue from Fundraising Dinner | $3,000 | |
| Total Revenues | $8,000 | |
| Expenses: | ||
| Other Expenses | ($5,500) | |
| Increase in Unrestricted Net Assets | $2,500 |
The cost of direct benefits should only include the cost of the benefit that the donor receives. In this example, the donor received a meal as a direct benefit for attending the event; therefore, only the cost of the meal is included as a direct expense. The other expenses associated with the event would be shown separately in the expense section of the statement of activities.
The cost of direct benefits can also be shown as a line item in the statement of activities expense section as follows:
| Revenues: | |
| Contributions | $5,000 |
| Fundraising Dinner Revenues | $4,000 |
| Total Revenues | $9,000 |
| Expenses: | |
| Direct Benefit Costs (Dinners) | ($1,000) |
| Other Expenses | ($5,500) |
| Total Expenses | ($6,500) |
| Increase in Unrestricted Net Assets | $2,500 |
An alternative way to present special events in the financial statements is by classifying the special events revenue as part exchange and part contribution revenue.
Exchange and Contribution Revenue
Special event revenue can be recognized as contribution revenue, exchange revenue, or both. Contributions are voluntary asset transfers to a new owner, under which the donor receives nothing in exchange. Contributions are recognized as revenue at the time received and are measured at the donor’s fair value. Exchanges are mutual transfers in which both parties receive and sacrifice something of a similar or equal value. In an exchange transaction, the revenue is not recognized until it is actually earned.
The money that is received from a special event is often a combination of both exchanges (the fair value of the benefit that is received by the attendee) and contribution revenues (the difference between the amount paid by the attendee and the fair value of the benefit received). For example, in a fundraising dinner conducted by a nonprofit organization, each event ticket was sold for $100 per attendee. The benefit the attendee receives is a meal that has a fair value of $35 that cost the organization $25. The $35 meal is the exchange transaction that occurs between the organization and the attendee. The difference between the $100 paid by the attendee and the $35 meal received is the $65 contribution revenue that will be immediately recognized by the organization.
This can be presented as follows:
| Revenues: | ||
| Contributions | $7,500 | $65 x 40 attendees + $5,000 |
| Fundraising Dinner Revenues | $1,400 | $35 x 40 attendees |
| Less: Direct Benefit Costs (Dinners) | (1,000) | |
| Special Events Gross Profit | $400 | |
| Total Revenues | $8,000 | |
| Expenses: | ||
| Other Expenses | ($5,500) | |
| Increase in Unrestricted Net Assets: | $2,500 |
If the special event does not occur until after the fiscal year end but the organization receives payments for the event in advance, the exchange portion of the payment (in the previous example, this would be the $35) will be recognized as deferred revenue in the statement of financial position for the fiscal year. When the event occurs in the subsequent accounting period and the benefit is received by the donor, the exchange portion will be properly recognized.
Accounting for In-Kind Contributions
It is common for nonprofit organizations to receive items from donors that will be used in special events for fundraising, like item auctions or raffles. The items can vary from gift certificates, merchandise, tickets, etc. These in kind gifts are to be reported as contribution revenues and are measured at the item’s fair value when it is received by the organization. For example, if an organization receives artwork from a donor that has a fair value of $2,000 at the time it was donated, the $2,000 would be recorded as contribution revenue and held as an asset until it will be transferred to the ultimate recipient. When the transfer is made to the ultimate recipient, the contribution revenue will be adjusted. If the organization auctioned off the artwork to the highest bidder at its fundraiser for $3,000, an adjustment would be made to increase the contribution revenue by $1,000 ($3,000-$2,000) and remove the asset from the accounting records.
*******
The foregoing is only a brief summary of the rules governing the classification of workers versus independent contractors. RDF Non-Profit News is published by Rossi Doskocil & Finkelstein LLP as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal, tax or accounting advice.
We are available to consult with you and your not-for-profit organization regarding any of these issues or to answer any questions based upon your specific facts and circumstances.