How should fees received upfront, prior to the provision of services, be accounted for? IFRIC recently considered this question but was unable to reach a definitive answer.
The role of the International Financial Reporting Interpretations Committee (IFRIC) is to provide interpretations on how IFRS should be applied in situations where:
- there are newly identified financial reporting issues not dealt with in IFRS, or unsatisfactory or conflicting
- interpretations of how IFRS should be applied have developed in practice.
However, the majority of issues raised for consideration by the committee are never added to its agenda, either because the issue is considered to be clearly dealt with by existing guidance in IFRS or because the project is outside the scope of IFRIC.
In this case, IFRIC considered how revenue should be recognised where a fund manager receives a one-off, non-refundable upfront fee followed by regular payments for ongoing services received. Normally in these situations the upfront fee remains non-refundable, even if the investor leaves the fund immediately after paying the fee. Therefore, many fund managers have immediately recognised such a fee as revenue.
However, IFRIC does not consider that this will normally be appropriate and argues that the recognition of revenue should depend on the point at which services were provided to the customer in return for the upfront fee. Even where a service is clearly provided to the customer upfront, that service may not have been ‘performed’ for the purposes of IAS 18 ‘Revenue’.
IFRIC debated this issue over three meetings with a view to issuing a draft interpretation. In the end the issue was removed from the agenda on the basis that it was "unlikely within a reasonable time frame to reach a consensus on further principles for determining the extent to which an upfront service had been provided".
IFRIC did agree on the following principles.
- Fees may be recognised as revenue only to the extent that services have been provided.
- While the proportion of costs incurred in delivering services may be used to estimate the stage of completion of the transaction, incurring costs does not, by itself, imply that a service has been provided.
- The receipt of a non-refundable initial fee does not, in itself, give evidence that an upfront service has been provided nor that the fair value of the consideration paid in respect of any upfront services is equal to the initial fee received.
The committee went on to explain that initial fees of a similar nature exist in many different industries, but the services provided and the revenue recognised will be dependent on the specific circumstances of the individual transaction and industry.
Smith and Williamson Commentary
Sometimes the published discussions of IFRIC surrounding whether items should be added to its agenda can, in themselves, provide useful information for the preparers of accounts. IAS 18 is a short and, on the face of it, quite straight forward standard. Yet, revenue recognition is a complex area and interpreting the principles of IAS 18 can prove difficult in practice. In this particular case, there is a very clear implication that IFRIC sees the performance of services as key to revenue recognition and not just the fact that a fee cannot be returned. IFRS reporters need therefore to think carefully about when to recognise the provision of services as revenue. IFRIC’s views on this matter does not just impact on fund managers, but also provides further guidance to all IFRS reporters, particularly those who are accounting for any kind of upfront fee.
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