Revenue – ifrs 15 handbook

Does the fee relate to
specific goods or
services transferred to
customer?
Account for as an
advanced payment for
future goods or services
Account for as a promised
good or service

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290 | Revenue – IFRS 15 handbook
Example 1 – Non-refundable up-front fees: Annual contract
Cable Company C enters into a one-year contract to provide cable television to 
Customer Z. In addition to a monthly service fee of 100, C charges a one-time 
up-front fee of 50. C has determined that its set-up activity does not transfer a 
promised good or service to Z, but is instead an administrative task. 
At the end of the year, Z can renew the contract on a month-to-month basis at 
the then-current monthly rate or can commit to another one-year contract at 
the then-current annual rate. In either case, Z will not be charged another fee on 
renewal. The average customer life for customers entering into similar contracts 
is three years.
C considers both quantitative and qualitative factors to determine whether 
the up-front fee provides an incentive for Z to renew the contract beyond the 
stated contract term to avoid the up-front fee. If the incentive is important to Z’s 
decision to enter into the contract, then there is a material right.
First, C compares the up-front fee of 50 with the total transaction price of 1,250 
(the up-front fee of 50 plus the service fee of 1,200 (12 × 100)). It concludes that 
the non-refundable up-front fee is not quantitatively material. 
Second, C considers the qualitative reasons that Z might renew. These 
include, but are not limited to, the overall quality of the service provided, the 
services and related pricing provided by competitors and the inconvenience 
to Z of changing service providers (e.g. returning equipment to C, scheduling 
installation by the new provider).
C concludes that although avoidance of the up-front fee on renewal is a 
consideration to Z, this factor alone does not influence Z’s decision over 
whether to renew the service. C concludes based on its customer satisfaction 
research data that the quality of service provided and its competitive pricing are 
the key factors underpinning the average customer life of three years. 
Overall, C concludes that the up-front fee of 50 does not convey a material right 
to Z.
As a result, C treats the up-front fee as an advance payment on the contracted 
one-year cable services and recognises it as revenue over the one-year contract 
term. This results in monthly revenue of 104 (1,250 / 12) for the one-year 
contract. 
Conversely, if C determined that the up-front fee results in a contract that 
includes a customer option that is a material right, then it would allocate the 
total transaction price including the up-front fee between the one-year cable 
service and the material right to renew the contract (see 
Section 10.4
).

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© 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
10 Other application issues | 291
10.6 Non-refundable up-front fees
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