Revenue recognition basis for income in nature of fees
A. Non-refundable upfront fees
Non-refundable upfront fee generally relates to
a) An activity that the entity is required to undertake at or near contract inception to fulfil the contract Or
b) Is in nature of advance payment for future goods or services O
c) in nature of non-refundable fee in part as compensation for costs incurred in setting up a contract or other administrative tasks.
Examples:
setup fees in some services contracts and
Initial fees in some supply contracts.
Treatment:
non-refundable upfront fees or Prepayments for supply are generally deferred and recognized over the period during which the related goods or services are provided. They are not immediately recognized as revenue upon receipt.
Special case: non-refundable fee as compensation
w.r.t when entity is charging non-refundable fee as compensation for costs incurred in setting up a contract or other administrative costs AND if those setup activities are such that it does not represent the transfer of services to the customer and hence donot account as performance obligation:
- entity shall disregard those activities (and related costs) while measuring progress.
- entity shall assess whether costs incurred in setting up a contract have resulted in an asset, which that shall be recognised as due from debtors in books.
B. Sales-based or usage-based royalty
Applicability:
The recognition norms shall of sales-based or usage-based royalty applies only when the royalty
a) relates only to a licence of intellectual property or
b) when a licence of intellectual property is the predominant item to which the royalty relates
license being predominant item: licence of intellectual property can be considered as the predominant item when, the entity has a reasonable expectation that the customer would ascribe significantly more value to the licence than to the other goods or services to which the royalty relates.
Revenue recognition-when:
(i) Entity shall recognise revenue for sales-based or usage-based royalty, only when (or) as the later of the following events occurs:
a) when there’s subsequent sale or usage : ie entity’s customer makes sale or uses it, triggering the royalty.
b) performance obligation to which the sales- based or usage-based royalty has been allocated, has been satisfied (or partially satisfied).
(ii) If the two conditions listed as trigger events are not met, then, the requirements on variable consideration apply to the sales-based/usage-based royalty.