What is Considered a Sponsorship?

Sponsorship in accounting refers to a transaction where an organization provides financial or in-kind support to an event, individual, or organization, usually in exchange for marketing or promotional benefits. Sponsorships are common in sports, arts, conferences, and charity events. For accounting purposes, it’s critical to understand the nature of sponsorship transactions, how they should be recognized, and how they impact the financial statements of both the sponsor and the recipient.

Sponsorship is a key part of many companies’ marketing strategies. But when it comes to accounting, sponsorship arrangements have specific guidelines that affect how they’re reported. This tutorial will explore what is considered a sponsorship, how it is accounted for, and include case studies with journal entries and financial statements to make the concept clearer.

Definition of Sponsorship

A sponsorship is a contract where one party (the sponsor) agrees to provide resources such as money, goods, or services to another party (the sponsored entity) in exchange for advertising or promotional opportunities. Sponsorships can be either:

1. Monetary Sponsorship – A company provides funds directly to an event or organization.
2. In-kind Sponsorship – A company provides products or services instead of money.

The key difference between sponsorship and donation is that sponsorships usually involve a benefit to the sponsor in terms of brand visibility or promotion, while donations are typically altruistic with no expectation of a direct return.

Example of Sponsorship in Real Life

Case Study 1: Sports Sponsorship

Let’s consider a real-world scenario where a company sponsors a sports team. Imagine that “TechSports Ltd.” signs a sponsorship deal with a local football team, “Town FC.” The agreement includes:

• TechSports will provide $50,000 per year in cash.
• In exchange, Town FC will display the TechSports logo on their jerseys and promote TechSports on their website.

Journal Entries for the Sponsor (TechSports Ltd.)

1. When the sponsorship payment is made:

• Debit: Sponsorship Expense $50,000 (Expense related to marketing/promotional activities)
• Credit: Cash $50,000 (Cash payment to the football team)

   Sponsorship Expense    50,000
       Cash                      50,000

The sponsorship payment is recorded as an expense because it is considered part of TechSports’ marketing efforts.

2. If the sponsorship is split over the contract duration: Suppose the sponsorship covers a year, but TechSports decides to record the expense monthly. Each month, the following entry would be made:

• Debit: Sponsorship Expense $4,166.67 (12-month amortization of the $50,000 sponsorship)
• Credit: Prepaid Expense $4,166.67

   Sponsorship Expense      4,166.67
       Prepaid Expense               4,166.67

This entry ensures that the expense is recognized over the period it relates to, reflecting the economic benefit TechSports receives over the year.

Journal Entries for the Recipient (Town FC)

1. When the sponsorship payment is received:

• Debit: Cash $50,000 (Receipt of sponsorship funds)
• Credit: Sponsorship Revenue $50,000 (Revenue from sponsorship agreement)

   Cash                            50,000
       Sponsorship Revenue                50,000

Town FC records the $50,000 as revenue because it is compensation for promoting TechSports through jersey logos and website banners.

2. If the sponsorship is paid in advance and spread over a year: If TechSports pays the full amount upfront, Town FC may decide to recognize the revenue monthly, matching the period in which the sponsorship benefits are provided.

• Debit: Cash $50,000
• Credit: Deferred Revenue $50,000 (Revenue received in advance, to be recognized over time)

   Cash                            50,000
       Deferred Revenue                   50,000

Each month, Town FC would then recognize part of the revenue:

• Debit: Deferred Revenue $4,166.67 (Portion of the advance recognized monthly)
• Credit: Sponsorship Revenue $4,166.67

   Deferred Revenue        4,166.67
       Sponsorship Revenue          4,166.67

Sponsorship Reporting on Financial Statements

Let’s take a look at how these sponsorship transactions appear in financial statements for both the sponsor and the sponsored entity.

TechSports Ltd. Financial Statements:

1. Income Statement (Sponsor) – Year 1:

   Revenue:                           $X
   Expenses:
      Sponsorship Expense:       $50,000
      Other Expenses:                 $X
   Net Income:                        $X

The $50,000 is recorded as an expense in the year the sponsorship takes place, affecting TechSports’ bottom line.

2. Balance Sheet (Sponsor) – Year 1:

   Assets:
      Cash:                               $X - 50,000
      Other Assets:                       $X
   Liabilities:
      Accounts Payable:                   $X
   Equity:
      Retained Earnings:                  $X

Cash is reduced by $50,000 when the payment is made.

Town FC Financial Statements:

1. Income Statement (Recipient) – Year 1:

   Revenue:
      Sponsorship Revenue:      $50,000
      Ticket Sales:                      $X
      Total Revenue:                     $X
   Expenses:
      Team Costs:                        $X
      Other Expenses:                    $X
   Net Income:                           $X

Town FC recognizes the $50,000 as revenue if the agreement is completed within one year.

2. Balance Sheet (Recipient) – Year 1:

   Assets:
      Cash:                                $50,000
      Other Assets:                        $X
   Liabilities:
      Deferred Revenue:              $50,000 (If paid in advance)
      Other Liabilities:                    $X
   Equity:
      Retained Earnings:                    $X

If the sponsorship is paid in advance, it appears as deferred revenue under liabilities, since the service (promoting the sponsor) is yet to be fully delivered.

Accounting Treatment of Different Types of Sponsorships

1. Monetary Sponsorship

A monetary sponsorship involves a direct payment of cash. As seen in the case study, both parties record the payment and revenue/expense in their books. The sponsorship is treated as an expense for the sponsor and revenue for the sponsored entity.

2. In-Kind Sponsorship

In-kind sponsorships involve goods or services rather than cash. For example, if a sportswear company provides $50,000 worth of gear to Town FC, the accounting would be:

• Sponsor (Sportswear Co.):
• Debit: Sponsorship Expense $50,000
• Credit: Inventory $50,000
• Recipient (Town FC):
• Debit: Inventory (Sportswear) $50,000
• Credit: Sponsorship Revenue $50,000

For both parties, in-kind sponsorships involve recognizing the fair value of the goods or services exchanged. The company offering the goods reduces its inventory, while the receiving entity adds the value of the goods as an asset and recognizes revenue.

3. Event-Based Sponsorship

Sometimes sponsorship is tied to specific events. For example, if a company sponsors a conference, the expense might be recorded only when the event takes place. If sponsorship is provided for a future event, the sponsor would record the payment as a prepaid expense, while the event organizers would record it as deferred revenue.

Key Accounting Standards

Depending on the jurisdiction, various accounting standards apply to sponsorships, such as:

• IFRS: Under IFRS, sponsorship is generally treated as a transaction involving the provision of services or promotional benefits, and both revenue and expenses are recognized over time.
• US GAAP: Similar treatment is provided under US GAAP, where revenue recognition depends on when the sponsored activities occur and when the benefits are delivered.

Conclusion

Sponsorship in accounting involves the exchange of financial or in-kind support for promotional benefits. It’s crucial for both sponsors and recipients to recognize sponsorship expenses and revenues appropriately, following the accrual principle and matching expenses with the period in which the promotional benefits are delivered.

By carefully analyzing sponsorship agreements and applying the correct journal entries, companies can ensure they present an accurate financial picture in their statements, whether they are spending on a sponsorship or receiving sponsorship funds.

Key Takeaways:

1. Sponsorships involve mutual exchange where one party promotes the other in return for funds or goods/services.
2. Journal entries ensure proper recording of sponsorship as either an expense or revenue depending on which side you are accounting for.
3. Financial statements reflect how sponsorship impacts income statements and balance sheets, with accurate recognition of revenue and expenses spread over time if needed.

By understanding these details, businesses and sponsored entities can maintain transparent and effective financial reporting, ensuring they comply with accounting standards and present accurate financial data.