The entity applies the requirements in paragraph 72 of IFRS 15 and concludes that the consideration payable
is accounted for as a reduction in the transaction price when the entity recognises revenue for the transfer of
the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the transaction price
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for each good by 10 per cent (€1.5 million ÷ €15 million). Therefore, in the first month in which the entity
transfers goods to the customer, the entity recognises revenue of €1.8 million (€2.0 million invoiced amount
less €0.2 million of consideration payable to the customer).
6.7.4.A
Accounting for upfront payments to a customer
At the November 2016 FASB TRG meetings, the TRG members discussed how an entity
should account for upfront payments to a customer. While the requirements for
consideration payable to a customer clearly apply to payments to customers under
current contracts, stakeholders have raised questions about how to account for upfront
payments to potential customers and payments that relate to both current and
anticipated contracts.
The FASB TRG members discussed two approaches. Under View A, an entity would
recognise an asset for the upfront payment and reduce revenue as the related goods or
services (or as the expected related goods or services) are transferred to the customer.
As a result, the payment may be recognised in profit or loss over a period that is longer
than the contract term. Entities would determine the amortisation period based on facts
and circumstances and would assess the asset for recoverability using the principles in
asset impairment models in other standards. Under View B, entities would reduce
revenue in the current contract by the amount of the payment. If there is no current
contract, entities would immediately recognise the payment in profit or loss.92
The FASB TRG members generally agreed that an entity needs to use the approach that best
reflects the substance and economics of the payment to the customer; it would not be an
accounting policy choice. Entities would evaluate the nature of the payment, the rights and
obligations under the contract and whether the payment meets the definition of an asset.
Some FASB TRG members noted that this evaluation was consistent with legacy US GAAP
requirements for payments to customers and, therefore, similar conclusions may be reached
under the revenue standard. The FASB TRG members also noted that an entity’s decision on
which approach is appropriate may be a significant judgement in the determination of the
transaction price that would require disclosure under the revenue standard.93
We believe an entity has to carefully evaluate all facts and circumstances of payments
made to customers to determine the appropriate accounting treatment. However, if an
entity expects to generate future revenue associated with the payment, we believe an
entity generally applies View A (assuming any asset recorded is recoverable). If no
revenue is expected as a result of the payment, View B may be appropriate.
6.8
Non-refundable upfront fees
In certain circumstances, entities may receive payments from customers before they
provide the contracted service or deliver a good. Upfront fees generally relate to the
initiation, activation or set-up of a good to be used or a service to be provided in the
future. Upfront fees may also be paid to grant access to or to provide a right to use a
facility, product or service. In many cases, the upfront amounts paid by the customer
are non-refundable. Examples include fees paid for membership to a health club or
buying club and activation fees for phone, cable or internet services. [IFRS 15.B48].
Entities must evaluate whether a non-refundable upfront fee relates to the transfer of a
promised good or service. If it does, the entity is required to determine whether to
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account for the promised good or service as a separate performance obligation (see 5
above). [IFRS 15.B49, B50].
The standard notes that, even though a non-refundable upfront fee relates to an activity
that the entity is required to undertake at or near contract inception in order to fulfil the
contract, in many cases that activity does not result in the transfer of a promised good or
service to the customer. Instead, in many situations, an upfront fee represents an advance
payment for future goods or services. In addition, the existence of a non-refundable
upfront fee may indicate that the contract includes a renewal option for future goods or
services at a reduced price (if the customer renews the agreement without the payment
of an additional upfront fee). In such circumstances, an entity would need to assess
whether the option is a material right (i.e. another performance obligation in the contract)
(see 5.6 above). [IFRS 15.B49]. If the entity concludes that the non-refundable upfront fee
does not provide a material right, the fee would be part of the consideration allocable to
the goods or services in the contract and would be recognised when (or as) the good or
service to which the consideration was allocated is transferred to the customer. If an entity
concludes that the non-refundable upfront fee provides a material right, the amount of
the fee allocated to the material right would be recognised over the period of benefit of
the fee, which may be the estimated customer life.
In some cases, an entity may charge a non-refundable fee in part as compensation for
costs incurred in setting up a contract (or other administrative tasks). If those set-up
activities do not satisfy a performance obligation, the entity is required to disregard
those activities (and related costs) when measuring progress (see 8.2 below). This is
because the costs of set-up activities do not depict the transfer of services to the
customer. In addition, the entity is required to assess whether costs incurred in setting
up a contract are costs incurred to fulfil a contract that meet the requirements for
capitalisation in IFRS 15 (see 10.3.2 below). [IFRS 15.B51].
The following illustration depicts the allocation of a non-refundable upfront fee
determined to be a material right.
Example 28.50: Non-refundable upfront fees
A customer signs a one-year contract with a health club and is required to pay both a non-refundable initiation
fee of $150 and an annual membership fee in monthly instalments of $40. At the end of each year, the
customer can renew the contract for an additional year without paying an additional initiation fee. The
customer is then required to pay an annual membership fee in monthly instalments of $40 for each renewal
period. The club’s activity of registering the customer does not transfer any service to the customer and,
therefore, is not a performance obligation. By not requiring the customer to pay the upfront membership fee
again upon renewal, the club is effectively providing a discounted renewal rate to the customer.
The club determines that the renewal option is a material right because it provides a renewal option at a lower price
than the range of prices typically charged for new customers. Therefore, it is a separate performance obligation.
Based on its experience, the club determines that its customers, on average,
renew their annual memberships twice
before terminating their relationship with the club. As a result, the club determines that the option provides the
customer with the right to two annual renewals at a discounted price. In this scenario, the club would allocate the
total transaction consideration of $630 ($150 upfront membership fee + $480 ($40 × 12 months)) to the identified
performance obligations (monthly services for the one-year contract and renewal option) based on the relative stand-
alone selling price method. In accordance with paragraph B40 of IFRS 15, the amount allocated to the renewal
option would be recognised when, or as, the future goods or services are transferred (e.g. years two and three of the
services if the renewal option is fully exercised) or when the renewal option expires.
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Alternatively, the club could value the option by ‘looking through’ to the optional goods or services using the
practical alternative provided in paragraph B42 of IFRS 15 (see 7.1.5 below). In that case, the club would
determine that the total hypothetical transaction price (for purposes of allocating the transaction price to the
option) is the sum of the upfront fee plus three years of service fees (i.e. $150 + $1,440) and would allocate
that amount to all of the services expected to be delivered or 36 months of membership (or $44.17 per month).
Therefore, the total consideration in the contract of $630 would be allocated to the 12 months of service ($530
($44.17 × 12 months)) with the remaining amount being allocated to the renewal option ($100 ($630 – 530)).
Assuming the renewal option is exercised for year 2 and year 3, the amount allocated to the renewal option
($100) would be recognised as revenue over each renewal period. One acceptable approach would be to
reduce the initial $100 deferred revenue balance for the material right by $4.17 each month ($100/24 months
remaining), assuming that the estimated renewal period of two years remains unchanged.
See 5.6 above and 7.1.5 below for a more detailed discussion of the treatment of options
(including the practical alternative allowed under paragraph B42 of IFRS 15) and 7.1 and
7.2 below for a discussion of estimating stand-alone selling prices and allocating
consideration using the relative stand-alone selling price method.
6.8.1
Implementation questions on non-refundable upfront fees
6.8.1.A Recognition
period
for a non-refundable upfront fee that does not relate
to the transfer of a good or service
At the March 2015 TRG meeting, the TRG members were asked over what period an
entity should recognise a non-refundable upfront fee (e.g. fees paid for membership to
a club, activation fees for phone, cable or internet services) that does not relate to the
transfer of a good or service.
The TRG members generally agreed that the period over which a non-refundable
upfront fee is recognised depends on whether the fee provides the customer with a
material right with respect to future contract renewals.94 For example, assume that an
entity charges a one-time activation fee of £50 to provide £100 of services to a customer
on a month-to-month basis. If the entity concludes that the activation fee provides a
material right, the fee would be recognised over the service period during which the
customer is expected to benefit from not having to pay an activation fee upon renewal
of service. That period may be the estimated customer life in some situations. If the
entity concludes that the activation fee does not provide a material right, the fee would
be recognised over the contract term (i.e. one month).
6.8.1.B
Determining whether a contract that includes a non-refundable upfront
fee for establishing a connection to a network is within the scope of
IFRS 15
Utility entities are often responsible for constructing infrastructure (e.g. a pipe) that will
physically connect a building to its network (i.e. connection) and for providing ongoing
services (e.g. delivery of electricity, gas, water). In exchange, a utility entity generally
charges the customer a non-refundable upfront connection fee and a separate fee for
the ongoing services. Furthermore, the connection fee and/or the fee for ongoing
services are often subject to rate regulation established through a formal regulatory
framework that affects the rates that a utility entity is allowed to charge to its customers.
Utility entities first need to assess whether some or all of the contract is within the scope
of another standard (e.g. IFRS 16 (or IAS 17), IAS 16). If the contract is partially within
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the scope of IFRS 15, the entity would need to separate the non-revenue components,
in accordance with paragraph 7 of IFRS 15, and account for the remainder within the
scope of IFRS 15 (see 3.4 above for further discussion).
To be within the scope of IFRS 15, a vendor-customer relationship needs to exist.
Provided such goods or services are an output of the ordinary activities of the entity,
we believe a vendor-customer relationship would exist (and the contract would be
wholly, or partially, within the scope of the standard) if:
• the ongoing service is part of the contract or part of an associated contract for
ongoing services that is combined with the contract to establish the connection if
the combined contract criteria in paragraph 17 of IFRS 15 are met. In a rate-
regulated environment, the contract to transfer ongoing services to a customer (e.g.
delivery of energy) may be implied as the customer has no alternative other than
purchasing the good or service from the entity that is responsible for creating the
connection; or
• the customer obtains control of the infrastructure asset (e.g. a pipe) or the connection.
6.8.1.C
Factors to consider when non-refundable upfront fees received for
establishing a connection to a network are within the scope of IFRS 15
As discussed in 6.8.1.B above, utility entities are often responsible for constructing
infrastructure (e.g. a pipe) that will physically connect a building to its network
(i.e. connection) and may receive a non-refundable upfront connection fee in exchange.
Applying the non-refundable upfront fee application guidance in such contracts often
requires significant judgement and depends on the facts and circumstances. For
example, if more than one party is involved, the utility entity may need to consider the
principal versus agent application guidance (see 5.4 above) in addition to the non-
refundable upfront fee application guidance.
The non-refundable upfront fee application guidance requires an entity to determine if
the upfront fee is related to a distinct good or service. As part of this assessment:
• a utility entity needs to determine whether the connection is a promised good or
service in the contract. It considers explicit promises in the contract and implied
promises that create a valid expectation of the customer that it will transfer control
of the connection to the customer. This is likely to require significant judgement if
the infrastructure asset remains an asset of the utility entity; and
• if the connection is a promised good or service, a utility entity needs to determine
whether the promise is d
istinct. In particular, the assessment of whether the
connection is distinct in the context of the contract is highly judgemental and
must consider the specific contract with the customer, including all relevant facts
and circumstances. Entities should not assume that a particular type of good or
service is distinct (or not distinct) in all instances. The manner in which the
promised goods or services have been bundled within a contract, if any, will
affect the entity’s assessment.
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As part of assessing whether the promise is distinct within the context of the contract, a
utility entity considers the three factors described in paragraph 29 of IFRS 15, as follows:
• Factor (a): the utility entity needs to understand the promise(s) it has made to its
customers and whether it integrates them to satisfy its promise(s). For example, if
it promised its customer the ongoing supply of services, it might also bear the risk
for distribution of these services (including ensuring continued connection).
Therefore, it may be providing a significant service of integrating promised goods
or services to provide a combined output;
• Factor (b): this factor is unlikely to be relevant in the assessment of whether
connection is distinct within the context of the contract because the ongoing
service and the connection are unlikely to modify or customise each other; and
• Factor (c): the utility entity has to determine whether the connection is highly
interdependent and highly interrelated with the ongoing service (e.g. supply of
electricity). For example, whether there is more than just a functional relationship
(i.e. one item, by its nature, depends on the other) because the utility entity cannot
provide ongoing services (its main output, e.g. electricity, gas, water) without the
connection and the customer cannot benefit from the connection without the
ongoing services (i.e. is there two-way dependency?).
If the utility entity concludes that connection is not a distinct good or service, the non-
refundable upfront fee is advanced payment for future goods or services and is
recognised as revenue when (or as) the future goods or services are provided. As
discussed above, in such situations, an entity must determine whether the non-
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