Under Singapore Financial Reporting Standards (SFRS), specifically SFRS 15 “Revenue from Contracts with Customers,” non-refundable upfront fees are generally not recognised as revenue when received. Instead, these fees are considered part of the total transaction price and are allocated to the performance obligations in the contract.
The key points regarding the recognition of non-refundable upfront fees are as follows:
Evaluate the Purpose of the Upfront Fee:
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- Determine if the upfront fee relates to the transfer of a promised good or service. If the fee is for the setup, initiation, or activation of a contract, it is often not considered a separate performance obligation.
Identifying Performance Obligations:
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- Assess whether the upfront fee provides a distinct service or benefit to the customer. If the customer does not receive a material right or distinct service in exchange for the upfront fee, it is not recognised immediately as revenue.
Allocation of Transaction Price:
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- The non-refundable upfront fee is typically included in the transaction price and allocated to the performance obligations in the contract. Revenue is recognised as the performance obligations are satisfied over time.
Cost Recovery:
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- Even if the upfront fee is non-refundable, it may be considered a prepayment for future goods or services. Revenue recognition is deferred until those goods or services are delivered or performed.
Time-Based Recognition:
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- If the contract involves a service to be provided over some time (e.g., membership fees), the upfront fee is recognised over the contract term, reflecting the period over which the services are provided.
Example: If a company charges a non-refundable upfront fee for membership in addition to monthly service fees, the upfront fee should be spread throughout the membership. Revenue from the upfront fee would be recognised proportionately as the membership services are provided, not when the fee is received.
Conclusion: Non-refundable upfront fees should generally not be recognised as revenue immediately upon receipt. They must be evaluated in the context of the contract, allocated to the identified performance obligations, and recognised as revenue over time as the related goods or services are provided. This approach ensures that revenue recognition aligns with the transfer of control of goods or services to the customer, as required by SFRS 15.