By Toby R. Leslie, CPA, Business Assurance & Advisory Services Partner
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which was incorporated into the existing codification under ASC 606 (the “Standard”). When the Standard becomes effective for private companies, it will replace ALL current FASB guidance on revenue recognition. The current guidance on revenue recognition is fragmented and the general guidance is contained in ASC 605, however those in the construction, software, franchisor and certain other industries, must also follow specific industry guidance. One key objective of the Standard was to replace all preexisting guidance, with one unified standard. For purposes of this blog, we will examine how the Standard will impact the revenue of initiation fees for private social clubs, by going through an example and comparing it to the current practice.
For purposes of our example, consider the following facts and circumstances:
Question: Under the current guidance, how is revenue typically recorded for the various fees charged to the members?
Under the current guidance, revenue follows the following basic principles contained in ASC 605-10-25.
The recognition of revenue and gains of an entity during a period involves consideration of the following two factors:
a. Being realized or realizable
b. Being earned
In determining when revenue had met the above criteria and should be recorded, the recording of membership dues and other additional services seem rather straight forward. The membership dues are realized or realizable over a period of time as the member is billed or pays (realized or realizable) and access to the Club is provided over a period of time (being earned). Thus membership dues should be recognized monthly. Conversely, other additional services such as green fees, food purchases, etc. are realized or realizable at a point in time when the member pays, or is billed for the services and the services are also earned at that specific point in time. The recording of initiation fees, however is not as straight-forward and has resulted in some diversity in practice. While the guidance in ASC 605-10-S99, made clear that such upfront fees should be recognized over a period of time (generally the customer relationship), that guidance is directly applicable to public entities and thus private clubs typically diverted from that guidance. When considering the period in which to recognize the initiation fees, the prevailing practice in many private clubs is to recognize the initiation fees upon acceptance of the member.
Question: If the prevailing practice currently is for private clubs to recognize membership dues over time, and initiation fees and other services at a point in time, does this assessment change under the new Standard?
In order to answer this question, let’s examine the relevant aspects of the guidance. Under the new Standard, an entity must apply a five-step process for determining how much and when to recognize revenue.
Below is a step-by-step analysis of the above example.
Step 1 – Identify the Contract with a Customer
In this example, the identification of the contract with the customer (member) is straightforward. There are two separate contracts in the above scenario:
- There is a contract between the member and the social club to provide access to the facilities.
- All other services are subject to an additional “contract” as any additional services, or goods are purchased.
Step 2 – Identify the Performance Obligations in the Contract
In the above example, each group of contracts are subject to their own set of separate performance obligations in the contract. It is of significant importance to note that acceptance of the member does not qualify as a separate performance obligation. In order to qualify as a separate performance obligation, such fees must be “distinct.” In this case, the membership dues and initiation fees are not distinct, as both provide the same benefit to the member (access to the Club).
Step 3 – Determine the Transaction Price
The transaction price for the contract to provide access to the social club is the initiation fee of $10,000, plus the $500 per month in dues. The transaction price for the other performance obligations are incremental and priced as the member purchases the goods or services.
Step 4 – Allocate the Transaction Price to the Performance Obligations in the Contract
The initiation fee and monthly membership dues represent a single performance obligation and thus should be combined and recognized over the same period. The allocation for the other goods and services are allocated as the member purchases such goods and services.
Step 5 – Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation
Recognition of the membership dues and initiation fees requires recognition over a period of time rather than at a specific point in time as access to the Club is an ongoing performance obligation. The period of time that the performance obligation is satisfied in this example is assumed to be the duration of membership.
Using the above example, assume a member signs up on day one of the reporting year and the Club has determined that the average duration of membership is 10 years. How much revenue in initiation fees and membership dues should the Club recognize for the reporting year?
Answer = $7,000 (12 x $500 + $10,000/10)
Under the above scenario, the remaining $9,000 of initiation fees would remain in deferred revenue, while the interest income associated with the note (if financed) would be recognized separately. Revenues associated with the incremental goods and services would be recognized at the point the goods and services are performed (typically at time of purchase).
For private social clubs that currently recognize initiation fees upon acceptance of the member, the impact will be significant. Initiation fees under GAAP will be recognized over the expected duration of membership and a potentially significant undertaking may be necessary to determine the amount of adjustment to beginning net assets for the deferral of previously recognized initiation fees. As a practical expedient, a Club could use an average of membership duration for purposes of determining the period in which to recognize the initiation fees, rather than tracking each member separately. The Standard will become effective for public entities in calendar year 2018.
Due to the significance of the potential adjustment, the time to determine the potential impact should be now!
 The Club Managers Association of America and Hospitality Financial and Technology Professionals, issued a joint publication entitled Uniform System of Financial Reporting for Clubs. This publication discussed the accounting for initiation fees briefly:
Initiation fees are treated as operating revenue if used for normal operations. If initiation fees are designated for capital improvements or for any other purpose, they should be included under the membership activities section on the Statement of Activities. In all cases, initiation fees must be included in this statement when they are earned.
While “when they are earned” is not made clear in the publication, the industry practice seemed to navigate to earned is when the fee is nonrefundable and the member is accepted to the club.
 A good or service is distinct if both of the following criteria are met; 1) Capable of being distinct–The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. 2) Distinct within the context of the contract–The promise to transfer the good or service is separately identifiable from other promises in the contract.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.