Membership in a club is comprised of a series of separate and distinct transactions between the club and the member during the time the individual is a member. These transactions include initiation fees, annual dues, assessments and charges for usage. The Financial Accounting Standards Board (FASB) has issued guidance on revenue recognition in two Accounting Standards Updates (ASU) that clarify the guidance included in FASB Accounting Standards Codification Topic 606 – Revenue from Contracts with Customers (ASC 606).
There has been much discussion regarding the impact of ASC 606 on recognition of revenue by clubs. The main question arising from ASC 606 has been whether initiation fees should be deferred and recognized into revenue over a period of time, which would represent a major shift in the long-accepted method of recognizing revenue from initiation fees when billed.
The core principle of ASC 606’s guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this and to limit divergence in practice, FASB established the following five-step revenue recognition model to provide a framework for determining when to recognize revenue.
Step 1 – Identify a contract with a customer
Step 2 – Identify the performance obligations in the contract
Step 3 – Determine the transaction price
Step 4 – Allocate the transaction price to the performance obligation(s)
Step 5 – Recognize revenue when (or as) the entity satisfies a performance obligation
This discussion will explain why the revenue recognition process for initiation fees should not be altered by ASC 606 and the related ASUs and will primarily focus on Steps 2 and 5 of the revenue recognition model. It is assumed that the club has identified that a contract with a customer exists and can readily determine the transaction price. ASC 606 requires that, if possible, each performance obligation be viewed as distinct. Accordingly, it is assumed that the initiation fee transaction contains a single performance obligation, admittance to the club and no allocation of the transaction price is necessary.
Step 2 of the revenue recognition model requires that the club identify the performance obligation(s) contained in the contract. A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. The performance obligation with respect to initiation fees is the admittance of the individual to membership. Initiation fees are typically not related to any future goods or services; rather, initiation fees establish the member’s right to be included on the membership rolls and to be billed their annual dues.
Step 5 of the revenue recognition model requires that revenue be recognized when (or as) performance obligations are satisfied by transferring goods or services to a customer. As previously noted, the initiation fee represents payment by the member for the right to be added to the membership rolls. This sole performance obligation is satisfied at the point the club admits the individual into membership. Upon adding the member to the membership roster, the club has present right to payment, in accordance with the club’s initiation fee billing policy. Furthermore, upon admittance to membership the individual has assumed the risks of membership. Specifically, an initiation fee that is paid is not refundable and a club is under no obligation to provide future services. In the event the member resigns their membership, the club ceases operations, or the club is otherwise unable to provide future services to the membership, the member has no recourse with respect to the initiation fee paid.
Each membership transaction is separate and distinct and do not impact the recognition of revenue from the others.
Every club is unique, it is therefore recommended that clubs consider relevant circumstances surrounding initiation fees when establishing accounting policies governing the recognition of such revenue.
John D. Daum, CPA, and James W. Gilson, CPA, are partners at Condon O’Meara McGinty & Donnelly LLP. They can be reached at [email protected] and [email protected].