Non-refundable upfront fees
In short – Some contracts include non-refundable upfront fees that are paid at or near contract inception – e.g. joining fees for health club membership, activation fees for telecommunication contracts and set-up fees for outsourcing contracts. The standard provides guidance on determining the timing of recognition for these fees.
In many cases, even though a non-refundable upfront fee relates to an activity that the entity is required to undertake to fulfil the contract, that activity does not result in the transfer of a promised good or service to the customer. Instead, it is an administrative task. For further discussion on identifying performance obligations, use this link.
If the activity does not result in the transfer of a promised good or service to the customer, then the upfront fee is an advance payment for performance obligations to be satisfied in the future and is recognised as revenue when those future goods or services are provided.
If the upfront fee gives rise to a material right for future goods or services, then the entity attributes all of it to the goods and services to be transferred, including the material right associated with the upfront payment. For further discussion on allocating the transaction price and customer options, use this link and this link, respectively.
The non-refundable upfront fee results in a contract that includes a customer option that is a material right if it would probably impact the customer’s decision on whether to exercise the option to continue buying the entity’s product or service (e.g. to renew a membership or service contract or order an additional product). (IFRS 15.BC387)