When it comes to tricky accounting concepts, revenue recognition is something that often causes confusion for nonprofit organizations. It can be difficult to determine how and when to recognize certain kinds of revenue. We’ve previously discussed how to recognize grant revenue, but other types of income – like ticket sales for special events and banquets – can be just as complicated.
In June 2018, the FASB issued ASU 2018-08, a new Accounting Standards Update containing detailed guidance on how to properly recognize different kinds of revenue. Among other things, this ASU explains how to differentiate a contribution from an exchange transaction. This guidance has a significant impact on how you should record income from special events.
For example, let’s say your nonprofit recently held your annual gala at a local banquet center. The event was well-attended, everything went smoothly, and the income far exceeded expectations. (While none of that actually has an impact on revenue recognition, it’s certainly the dream of every organization!) Tickets to attend the gala were sold for $50 per person and included a delicious dinner. The food for the dinner was purchased through a local restaurant at a per-person cost of $28 per attendee.
To properly present the sale of the ticket on your financial statements, you must first understand that there are actually two different elements that comprise it. When a ticket was purchased, the attendee received something of measurable value – a $28 meal. This is considered the “exchange” portion of the transaction. According to ASU 2018-08, since the attendee received something of commensurate value, this should be recorded as event revenue. But what about the $22 difference between the price of the ticket and the cost of the meal? Since the attendee did not receive anything in exchange for this extra $22 (other than a fun evening out, hopefully) that difference is considered a contribution and should be recorded as such. In other words, every time one of these tickets is sold, you should allocate $28 to a revenue account and $22 to a contributions account.
Implementing this ASU may be difficult at first, as it could alter the presentation of your organization’s special event on the financial statements. If you have questions about the proper way to recognize revenue, don’t be afraid to reach out to your nonprofit accountant for assistance.
