ACCA Strategic Business Reporting (SBR) Practice Exam

When are non-refundable upfront fees recognised as revenue?

1. At the moment the contract is signed

2. After a specified period of time

3. When the goods or services are provided

4. On a straight-line basis over the contract term

The correct answer is: When the goods or services are provided

Non-refundable upfront fees are recognized as revenue when the goods or services are provided because this aligns with the revenue recognition principle, which states that revenue should be recognized when it is earned and realizable. In this context, earning revenue means fulfilling obligations within the contract, such as delivering goods or providing services. When a fee is received upfront but is non-refundable, it does not indicate immediate revenue recognition. Instead, it becomes part of the overall obligation that the company must satisfy before recognizing that fee as revenue. This approach ensures that revenue recognition matches the timing of providing the related goods or services, reflecting a more accurate representation of the company's performance and position. This timing is important, as recognizing the revenue too early could misrepresent the financial performance of the company. Therefore, linking revenue recognition directly to the performance of service or delivery of goods provides a more faithful depiction of the economic activity involved.