Defer up-front fees

There are many situations in which fees are obtained in advance from customers, and recognition of the related revenue must be deferred. This is typically because the payment would not have been received from the customer if the seller had not committed to ongoing involvement in the sale transaction to provide additional goods or services. When this happens, recognition of the fees should be over the period covered by the additional goods or services. Examples of deferred revenue recognition situations are:

  • Member initiation fee. A health club, dance studio, boxing gym, or similar entity sells a membership to a client, which is comprised of an initiation fee and ongoing periodic charges.

  • Startup fee. A business charges its customers a startup (or activation) fee to begin service, likely accompanied by ongoing subscriber fees.

  • Technology licensing fee. The holder of the rights to technology charges a fee to someone who wants to use the underlying rights in its product.

  • Website hosting fee. A company that maintains a server farm charges its customers a fee to host the files related to a company's website, where the bulk of the cost related to this service is incurred up front by the hosting company.

  • Website subscriber fee. A website charges its customers an annual fee to access the forms, databases, and advice available on the site.

For all of these examples, the Securities and Exchange Commission (SEC) has determined that the recognition of all revenue related to payments made in advance by customers must be deferred, except for situations where the fees are paid specifically in exchange for products or services related to a separate earnings process. Thus, customers are really making payments (irrespective of their timing) that relate to the ongoing products and services provided by a seller. This means that the acts of setting up a customer on a website or selling a gym membership (as examples) do not constitute separate events for which revenue should be recognized.

Related Courses

Bookkeeping Guidebook 
How to Audit Revenue 
Revenue Recognition