Live Nation Entertainment (LYV), a live entertainment and ticketing company, halted all concert tours and closed all of its venues for much of 2020 due to the pandemic. Revenue plunged 84% and resulted in an operating loss of $1.7 billion in 2020. The result would have been worse if not for an accounting change.

In its 2019 10-K, Live Nation disclosed that concert advertising costs are expensed in the year they occur:

“All advertising costs incurred during the year for shows in future years are expensed at the end of the year.”

In its 2020 10-K, Live Nation keeps the prior year’s language, then seemingly contradicts it by disclosing it’s now pushing advertising costs for cancelled events into the future:

“All advertising costs incurred during the year for shows in future years are expensed at the end of the year. If a current year event is rescheduled into a future year, all advertising costs incurred to date are expensed in the period when the event is rescheduled.”

It’s not surprising Live Nation would want to match future concert revenue with associated expenses. But pushing ad expenses incurred in 2020 into future periods understates Live Nation’s 2020 operating loss. The company acknowledges this when explaining the 89% decline in total fan count in 2020:

“Concerts had an operating loss for the year largely due to lost business resulting from the global COVID-19 pandemic and from sunk costs, such as advertising expenses, associated with shows cancelled or rescheduled to 2021.”

How much was sunk but not recognized? Live Nation doesn’t make it easy to determine. First, the company doesn’t break out “general” advertising expenses, which are expensed when incurred, from “event-related” advertising, which is recognized when a show occurs. Second, Live Nation includes language that seems to conflict with its disclosure about pushing 2020 ad costs into the future:

“However, all advertising costs incurred during the year and not previously recognized are expensed at the end of the year.”

Here’s our estimate:

Live Nation accounts for refunds it issued for cancelled shows in accrued expenses. For the prior two years, accrued expenses were, on average, 11.75% of revenue. If we normalize the spike in accrued expenses as a percent of revenue in 2020 and subtract it from reported accrued expenses, we get a rough refund estimate of $674.8 million.

We are assuming that anyone receiving a refund initially purchases a ticket, in part, because the event was marketed to them. If we take the average advertising expense as a percent of concert revenue for the prior two years of 5.2% and multiply it by our refund estimate, we get $35.1 million.

Live Nation also includes $35 million in concerts that have been rescheduled after December 31, 2021 in long term liabilities, suggesting another $1.82 million in sunk but not yet recognized ad costs. In total, we estimate Live Nation spent $36.92 million advertising concerts that were cancelled in 2020 and will be recognized in 2021 and beyond. This is approximately 7.7% of Live Nation’s total ad spend in each of the prior two years.

On one hand our estimate may be high, as you’ll recall Live Nation lumps general and event-related ad costs together, meaning we’ve overstated ad costs as a percent of revenue used in our calculation. On the other hand, using only our estimate for refunds likely understates Live Nation’s event-related ad expense as some customers elected to receive vouchers to future events rather than refunds.

DuDil has contacted Live Nation for more information. Specifically, we requested the company provide us the ad expenses incurred in 2020 that will be recognized in the future. We’ll update subscribers when we receive new information.