How should not-for-profit entities account for non-refundable upfront fees?
There is diversity in the way that not-for-profit (NFP) entities account for non-refundable upfront fees (for example, joining fees for a club or an enrolment fee at a school) in accordance with AASB 15 Revenue from Contracts with Customers. Some NFPs recognise a contract liability for non-refundable upfront fees received, and then recognise revenue as and when goods or services are provided to customers. Other NFPs recognise revenue upfront when the non-refundable fees are received.
In response to this, the Australian Accounting Standards Board (AASB) has added Illustrative Example 7A to the Australian Illustrative Examples for NFPs contained in AASB 15. This illustrates the application of AASB 15 to transactions where NFPs charge upfront fees to customers or members, for example:
- Joining fees for a club or membership body
- Enrolment fees at schools
- Other establishment or setup fees where a fee is paid at or near the beginning of the contract, and the customer can renew the contract each year without paying an additional fee.
The fact pattern for Illustrative Example 7A is as follows:
An organisation offers enrolment to prospective clients for the services it provides. Upon accepting an offer of enrolment, the prospective client must pay an upfront fee (sometimes referred to as an ‘acceptance fee’, ‘entry fee’ or ‘enrolment fee’). The enrolment form sets out the following terms and conditions relevant to the fee:
- Upon payment of the fee, future service is guaranteed for the client to commence in the agreed-upon year and on an ongoing basis;
- The fee is non-refundable and non-transferable; and
- The fee is not offset against any future fees that are charged on an ongoing basis for continued access to the services.
Extracted from proposed new Illustrative Example 7A in AASB 15.
Illustrative Example 7A includes an analysis to determine whether the agreement falls within the scope of AASB 15. If within the scope of AASB 15, the example then considers:
- What are the performance obligations in the contract?
- Are the activities associated with the non-refundable upfront fees one of the performance obligations?
In this regard, it directs us to the following guidance:
- Accounting for non-refundable fees in AASB 15, paragraphs B48-B51
- Identifying performance obligations in AASB 15, paragraphs 22-30 and F20-F27.
The analysis highlights that performance obligations do not include activities that an entity must undertake to fulfil a contract, unless those activities transfer a promised good or service to a customer. This means that a fee received upfront for activities such as setting-up a customer on a system, which is an internal administrative task, is accounted for as an advance payment for future services.
How is revenue recognised?
Where the activity associated with the upfront fee does not comprise a separate performance obligation, being an advance payment for future services, revenue is recognised under AASB 15 as those future services are provided.
If the non-refundable upfront fees are compensation for costs to setup a contract – for example, performing an administrative task - and those setup tasks are not a separate performance obligation, they are disregarded when determining progress towards completion. This is outlined in AASB 15, paragraph B51.
If the customer has an option to renew the contract and that option provides a material right – for example, there is no requirement to pay a further joining fee on renewal - the period for recognising revenue for the non-refundable upfront fee may stretch beyond the initial contract period.
The amendments apply to annual periods beginning on or after 1 July 2022, with early adoption permitted for 30 June 2022 year-end reporting.
Illustrative Example 7A is merely clarifying the existing requirements for non-refundable fees contained in AASB 15, and the AASB Staff FAQ 12 (enrolment fees), for 30 June 2022. Therefore, we expect NFPs to apply the steps contained in this example when accounting for non-refundable upfront fees.
Although applicable since 2019, many NFPs may still be experiencing difficulties determining the appropriate accounting for revenue and grant contracts. Please contact BDO’s IFRS & Corporate Reporting team if you require assistance.