Membership Fee Accounting

Top

Newsletter Sign Up

Home >> Revenue Recognition Topics

The proper accounting for membership fees is that, if a company sells a membership fee that can be cancelled by customers for a full refund at any time during the membership period, then the SEC holds that revenue recognition cannot occur until the end of the contractual period. The reason for this position is that there is uncertainty as to whether the fee is fixed or determinable at any point before the end of the period, since the customer has the right to unilaterally terminate the contract and receive a refund. In the meantime, cash received for such fees should be recorded in a liability account.

The SEC has indicated that it will not object to the recognition of refundable membership fees, net of estimated refunds, over the membership term, but only if all of the following criteria have been met:

Large pool of data. The estimates of terminations and refunded revenues are made from a large pool of homogeneous items.
Reliable refund estimates can be made. This is not the case if there are recurring and significant differences between actual and estimated termination experience (even if the impact of the variance on the amount of estimated refunds is not material to the financial statements), or if there are recurring variances that are material to either revenue or net income in quarterly or annual financial statements.
Sufficient historical basis. A company should have a sufficient basis of historical information upon which to base its refund estimates, and it expects that this information is predictive of future events. Such estimates should take account of the following:
- Historical experience by class of customer and service type
- Trends in the historical information and the reasons for those trends
- The impact of competing products or services
- Changes in the ease with which customers can obtain refunds
Fixed membership fee. The amount of the membership fee was fixed at the beginning of the agreement.

Only if all of these criteria are met will the SEC allow revenue recognition for membership fees prior to the termination of customer refund rights. If revenue is recognized under these criteria, then a company should record the initial fees received from customers in two accounts:

The amount of the fee representing estimated refunds is credited to a monetary liability account, such as “Fees refundable to customers.”
The amount of the fee representing unearned revenue is credited to a non-monetary liability account, such as “Unearned revenues.”

If a company recognizes refundable membership fee revenue ratably, then it should use a retrospective approach when adjusting for changes in estimated refunds. Under this method, unearned revenue and refund obligations are remeasured and adjusted at each balance sheet date, with the offsetting debit or credit being recorded as earned revenue.

A company does not have to recognize revenue ratably as allowed under these criteria. The SEC will also allow the complete deferral of all related revenue until the refund period lapses, even if a company meets all of the criteria noted here.