revenue recognition
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If health club sells lifetime memberships for 5000 each that is not refundable, the owners would want the revenue to be recognized immediately. Is there an economic incentive to defer the membership revenue in accordance with SAB 101?
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Hi there,
First, here is some background information regarding SAB 101:
AMID CONCERNS ABOUT IMPROPRIETIES, the SEC issued SAB 101, which provides guidance on recognizing, presenting and disclosing revenue in financial statements. The official implementation date is no later than the last quarter of fiscal years beginning after December 15, 1999
SAB 101 IS BASED ON THE PRINCIPLE that in companies' financial reporting, revenue should not be recognized until it is realized or realizable and earned. Before revenue is recognized, the following criteria must be met: persuasive evidence of an arrangement must exist; delivery must have occurred or services been rendered; the seller's price to the buyer must be fixed or determinable; and collectability should be reasonably assured.
The general economic incentive would be the reduction of taxes. While the health club has already received the cash related to the membership, by delaying recognition of that revenue, they can delay and minimize the amount of federal tax that would be associated with it.
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