Unexercised rights and non-refundable upfront fees

Learning objectives

• Calculate revenue from expected breakage in proportion to the pattern of rights exercised by the customer, subject to the constraint on variable consideration, or the absence of such revenue when the entity does not expect to be entitled to it.L2, L3
• Determine whether non-refundable upfront fees relate to the transfer of a good or service or are an advance payment for future goods or services.L2, L3
• Record a prepayment as a contract liability and its subsequent recognition as revenue.L2

Normative references

• IFRS 15On receipt of a prepayment, the entity recognises a contract liability equal to that payment for its performance obligation to transfer (or to stand ready to transfer) future goods or services; it derecognises that liability, and recognises revenue, when it transfers those goods or services.
• IFRS 15A non-refundable prepayment grants the customer a right to receive future goods or services; some customers do not exercise all of their rights, these unexercised rights often being referred to as 'breakage'.
• IFRS 15If the entity expects to be entitled to a breakage amount, it recognises it as revenue in proportion to the pattern of rights exercised by the customer; otherwise, it recognises it when the likelihood of the customer exercising its remaining rights becomes remote. The assessment takes into account the constraint on estimates of variable consideration.
• IFRS 15 §B47Consideration received that is attributable to unexercised rights and that the entity is required to remit to another party (for example, a government entity under unclaimed property laws) is recognised as a liability, not as revenue.
• IFRS 15Some contracts include a non-refundable upfront fee charged at or near contract inception: joining fees in health club membership contracts, activation fees in telecommunication contracts, set-up fees in some services contracts, initial fees in some supply contracts.
• IFRS 15The entity assesses whether the upfront fee relates to the transfer of a promised good or service. In many cases, the activity performed at inception does not transfer anything to the customer: the fee is then an advance payment for future goods or services, recognised as revenue when they are provided, over a period that may extend beyond the initial term if a renewal option provides a material right.
• IFRS 15 §B50If the non-refundable upfront fee relates to a good or service, the entity assesses whether it should be accounted for as a separate performance obligation in accordance with paragraphs 22 to 30.
• IFRS 15A non-refundable fee may in part compensate for costs incurred in setting up the contract. If those activities do not satisfy a performance obligation, they and their costs are disregarded in measuring progress (input method), because they do not depict the transfer of services; the entity assesses whether those costs should be recognised as an asset as costs to fulfil the contract.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

12 questions

• On 15 November 20X1, the caterer Saveurs de Loire receives a non-refundable deposit of EUR 4,000 for a banquet scheduled on 20 January 20X2. True or false: because the deposit is non-refundable, the caterer recognises revenue of EUR 4,000 in its 20X1 financial statements.L2
• The bookshop Page Blanche sells non-refundable gift cards that can be exchanged for books. True or false: the payment received gives the customer a right to future goods, and part of those rights may never be exercised; these unexercised rights are commonly referred to as breakage.L2
• The Azur sports club charges each new member a non-refundable registration fee of EUR 250, in addition to a monthly subscription of EUR 40. Registration involves opening a file and handing over a badge, without any service yet being provided to the member. How does the club account for the registration fee?L3
• Hydrolis, which installs and maintains water fountains in offices, charges its customers non-refundable upfront fees when contracts are signed. Which of the following statements are correct?L3
• On 1 September 20X1, the Lotus studio sells a non-refundable book of {sessions_total} yoga sessions for {package_price}, collected the same day. At 31 December 20X1, the customer has attended {sessions_used} sessions. The studio expects all sessions to be used (case data) and all sessions have the same value (teaching assumption). Determine the 20X1 revenue and the contract liability at 31 December 20X1.L2
• On 1 October 20X1, the software publisher Formatech collects a non-refundable prepayment of {prepayment} for a package of {days_total} training days, which the customer company schedules freely over eighteen months. At the 31 December 20X1 year end, {days_delivered} days have been delivered. Formatech expects the package to be used in full (case data); each day has the same value (teaching assumption). Calculate the revenue to be recognised in 20X1 and the contract liability balance at year end.L2
• On 1 January 20X1, the publisher Horizon Voile collects an annual subscription of {subscription_price} entitling the subscriber to {issues_total} monthly issues of its magazine; the receipt was recorded as a contract liability. At the end of May 20X1, {issues_delivered} issues have been delivered to the subscriber; all issues have the same value (teaching assumption). Record the entry recognising the revenue for the issues delivered.L2
• Under a supply contract, the engineering workshop Ferrand received from an industrial customer an advance payment of {prepayment} covering {parts_total} identical spare parts deliverable on demand; this payment is shown as a contract liability. During the quarter, Ferrand delivers {parts_delivered} parts, of which the customer obtains control on receipt (case data). Record the entry relating to these deliveries.L2
• Nuvola signs a 24-month data hosting contract with a customer, for a monthly fee of EUR 1,000, and charges a non-refundable set-up fee of EUR 6,000. The set-up consists of internal configuration tasks that transfer no good or service to the customer. The contract may then be renewed each year at the same monthly fee, without any new set-up fee; Nuvola has concluded (professional judgement) that this renewal option provides the customer with a material right. How does Nuvola account for the set-up fee?L3
• Thermes d'Argile sells non-refundable prepaid vouchers for treatments in 20X1 for EUR {vouchers_sold}. Based on its experience with comparable vouchers (case data), the entity expects rights of EUR {expected_unexercised} never to be exercised and concludes, after considering the constraint on estimates of variable consideration, that it expects to be entitled to that amount. In 20X1, customers use vouchers for EUR {vouchers_redeemed} of treatments. No amount must be remitted to a third party. Calculate revenue for 20X1 and the contract liability at the end of 20X1.L3
• The bookshop chain Bons Lumière sells gift cards. In the region where it operates, an unclaimed property law requires it to remit to the public authority the balance of cards that remain unused at expiry (case data). Bons Lumière expects balances of EUR 4,000 never to be used. How does it account for this amount?L2
• Nuage Clair enters into a 3-year IT hosting contract and charges non-refundable upfront fees of EUR 30,000, intended, among other things, to cover its set-up costs of EUR 18,000 (migrating the data onto its own servers). Its analysis, not challenged here, concludes that these set-up activities transfer no service to the customer and satisfy no performance obligation. The hosting service is satisfied over time, and progress is measured on the basis of costs incurred (input method, a choice of the case). Which treatment is appropriate?L3