Due to the unfolding COVID-19 pandemic, many not-for-profits have recently had to cancel major upcoming events, including musical and theatrical performances, symphony and performing arts shows, fundraising events, and conferences. These circumstances leave some not-for-profit organizations wondering how to account for the prepaid tickets to these events.
First, organizations with deferred revenue related to now-canceled events must decide whether there is a legal obligation to return the funds to purchasers. Organizations should consult legal counsel for guidance.
If an organization has the opportunity to keep the funds, they should understand the accounting and tax implications of doing so. The following Frequently Asked Questions help address these issues.
Q1: If an organization has deferred revenue for a now-canceled event, and the event will not be rescheduled, when can the organization remove the ticket value from deferred revenue liability?
The recognition of revenue under generally accepted accounting principals (U.S. GAAP) will depend on the facts and circumstances unique to the organization.
Some organizations are requesting ticket holders donate the ticket value to the organization. For any tickets that are “donated back” to the organization, the organization should recognize contribution revenue and remove the deferred revenue liability when they receive notice from each ticket holder that the ticket holder is donating the ticket value.
In other cases, the organization may issue a credit or gift certificate to the ticket holder for purchasing a ticket to a different show at a later date. In this situation, the organization would follow its normal procedures for accounting for credits and gifts certificates. Typically, this means the ticket value would stay in deferred revenue liability until it is redeemed by the ticket holder for a purchase at a later date.
Finally, some organizations have a “no refunds” policy for canceled shows and are relying on that policy to forego issuing a refund or credit to the ticket holders. In this situation, the organization would recognize revenue and remove the deferred revenue liability following its normal procedures for when to recognize ticket revenue from a canceled show. In determining the appropriate timing of when to recognize the ticket revenue, the organization should consider the details of its “no refunds” policy, such as if there is a short window of time where the organization allows refund requests for canceled shows (for example, 60 days after the date of the canceled show).
Q2: When an organization does recognize the revenue, should the revenue be classified as contribution revenue or ticket revenue?
The categorization of the revenue as either a contribution or ticket (earned) revenue depends on the facts and circumstances that triggered the revenue recognition. Below are some guidelines to consider in classifying the revenue:
- Contribution: If revenue is recognized because of communication with the ticket holder that they are donating the ticket to the organization, then the revenue recognized should be classified as a contribution. The communication may be directly from the ticket holder making an affirmative decision to donate the ticket. Alternatively, the communication could be from the organization to the ticket holder stating that the organization will consider the ticket donated back to the organization if the ticket holder doesn’t request a refund by a certain date.
- Ticket revenue: If there is no communication with the ticket holder about donating the ticket back to the organization, then the revenue recognized should be classified as ticket (earned) revenue.
Q3: To the extent the organization converts deferred revenue to contribution revenue, does the organization need to issue a donor receipt letter?
An organization electing to keep prepaid funds essentially converts what was a fee-for-service arrangement into a charitable contribution. The purchase price of the ticket is deemed returned to the purchaser, followed by a charitable contribution of the same amount back to the organization. While no cash exchanges hands, the organization must now recognize a charitable contribution. The organization should consider the following:
- Donor records are updated to reflect the donation. If the ticket purchaser is also a regular donor to the organization, this contribution should be added to the donor’s records.
- Issue a donor receipt letter if the ticket price is more than $250.
- Include the contribution in any year-end donor summary provided to donors.
Note that since the ticket is deemed refunded, the ensuing charitable contribution is in the form of cash. This is not a noncash contribution of a ticket, as the ticket is worthless once the associated event is canceled.
Q4: If an organization has a deferred revenue liability for prepaid tickets from a canceled event, but the organization intends to reschedule the event for later this year, what accounting issues should the organization consider?
The organization should follow its normal procedures for accounting for the ticket revenue for events that are rescheduled for a later date. Typically, this means leaving the deferred revenue liability on the balance sheet until the rescheduled event occurs. Any refunds paid to ticket holders that do not want to attend the event on the rescheduled date would reduce the deferred revenue liability.
If you have any other questions regarding how to handle a cancelled event at your not-for-profit, contact a Clark Nuber professional.