Question

A company named Two’s Up provides mobile phone services. Two’s Up sells two year contract plans. Customers must pay a non-refundable up-front activation fee of $60 on the date they enter into the contract, plus a monthly usage fee of $30 (to a total of $720 over the life of the contract). The costs to activate the phone service are nominal (i.e. it costs Two Up nothing to activate the contracts), and he monthly usage-fee more than covers operating costs.

d) If a customer buys a two-year contract plan from Two’s Up and pays the $60 activation fee on 1 March 2016, when should this be recognised as revenue (Justify your answer)?

Answer 1

The non-refundable upfront activation fee of $60 should be recognised over the course of 2 years of contract plan since it doesn't provide any distinct performance obligation to the customer.

As per IFRS 15, if the non-refundable upfront fee is just a part of contract at initial stage i.e. charged at inception of the contract and does not result into transfer of goods or services, then the revenue from it should be recognised over the discharge of promised goods or services.