Revenue Recognition of Admission Fees Received by an Association

Table of Contents

1. Query

2. Relevant Provisions

3. Conclusion

1. Query

An Association was registered under the XYZ Societies Registration Act, in the year 2003 to promote sports activities. It is regulated by the Memorandum of Rules and regulations framed thereunder. It receives applications for membership along with ‘one-time payment’ of entrance fee for which membership is confirmed subject to vacancies in the association. The member enjoys rights and privileges as per the category of membership to which he has applied.

The entrance fee received by the association is treated as a liability until the application is converted to confirmation of membership. When the membership is confirmed, such an amount is capitalized and transferred to Capital Fund.

Whether the accounting treatment followed by the association is in accordance with the principles prescribed under relevant accounting standards?

2. Relevant Provisions

Paragraph 49 (b) of the ‘Framework for the Preparation and Presentation of Financial Statements‘, issued by the Institute of Chartered Accountants of India, defines the term, ‘liability’ as

“A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits”

Accounting Standard (AS) 9, Revenue Recognition, states that in a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.

Read More About Accounting Standards (AS)

3. Conclusion

It is concluded that the association is under an obligation to refund the entrance fee received in advance in case the membership is not confirmed or rejected, which results in an outflow from the enterprise of resources embodying economic benefits. Therefore, the entrance fee received in advance meets the characteristics of liability till the decision of granting a membership is taken.

Further, the recognition of revenue depends on the nature of the services being provided and the timing of the performance of such services. Thus, it becomes necessary to determine whether a member is receiving goods and services or any other rights or privileges in the capacity of an owner or in the capacity of customers. Where the entrance fee is received in the capacity of owners then the same shall be as a contribution to capital by the owner and would not be considered as revenue from customers. But, where it is determined that the entrance fee from any membership category is a combination of ownership and revenue transaction, a portion of the entrance fee should rationally and systematically be recognized immediately as a contribution of ‘Capital from an Owner’ and another portion should be recognised as revenue on a systematic and rational basis.

References

 –  EAC opinion Query 10, Volume 40- Part II

–  Opinion finalized on 29.10.2020 and 30.10.2020

–  AS 9

Dive Deeper:
Revenue Recognition under Accounting Standard 9