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IAS 18 Revenue Recognition - Initial Fees Received by a Fund Manager

Go To List of IFRIC Issues Issue Description: How should revenue be recognised by a fund manager when a fund manager receives a one-off non-refundable up-front fee followed by regular payments for ongoing services received. Discussion at IFRIC Meeting September 2006 Discussion at IFRIC's September 2006 meeting resulted in the IFRIC asking the staff to explore two issues: The first issue was to identify the service provided by the fund manager that is being compensated by the up-front payment. Several IFRIC members expressed a view that, for the initial fee to be recognised at the time the investor makes the initial investment, the fund manager must already have provided a service to the customer. Staff identified the following as services that may been provided to the customer in advance of the initial investment: Services relating to the provision of up-front investment advice. Services relating to the creation of units in the fund and brokerage. Services related to the payment of a sales commission. Services connected to ongoing fund management. IFRIC discussed each of these. Much of the discussion was focused on the provision related to up-front investment advice. IFRIC members expressed concern on recognising revenue on up-front investment advice. In many cases, this advice would be free even if the investor decides not to invest in the fund. The IFRIC questioned the value that could be allocated to such services. In general, the IFRIC agreed that as long as services given to the customer could be identified at inception, revenue in respect of those services could be recognised when the services were provided. IFRIC also decided that since not all services could be identified up front, revenues relating to post-investment services should be deferred. The second issue was how the deferred income should be measured. This discussion was fairly short. The IFRIC agreed that revenue deferred in regards to the fee received up front had to be recognised based on a 'systematic approach' that reflects how the service is provided to the investor. The IFRIC asked the staff to develop a paper based on the decisions taken by the IFRIC. Discussion at IFRIC Meeting November 2006: In September 2006 the IFRIC discussed how revenue should be recognised by a fund manager when a fund manager receives a one-off non-refundable up-front fee followed by regular payments for ongoing services received. At this meeting the IFRIC discussed a staff paper based on the decisions made in September. Treatment of up-front investment advice The IFRIC had a thorough debate on the identification of services provided at the initial investment in a fund. The IFRIC confirmed that revenue is to be recognised to the extent that the up-front fee received or receivable relates to identifiable services that have been provided and can be measured reliably. The remainder of the up-front fee should be treated as deferred revenue. The customer perspective In September 2006 the IFRIC tentatively concluded that the recognition of revenue should be based on the customer's perspective of when the benefit of the services are received not the supplier's perspective of when the services are delivered. The staff concluded that the use of the customer perspective is not required by IAS 18 Revenue and that an Interpretation based on a customer perspective model would likely result in significant changes to the recognition of revenue in a wide range of situations which are not necessarily required by IAS 18. The IFRIC agreed with the staff and concluded that revenue should be recognised at the point at which the selling entity provides the services. How should revenue in respect of up-front fees be recognised? The staff proposed a hierarchy that could be used to determine the extent to which revenue in respect of upfront fees should be deferred: To the extent that an entity performs up-front services which can be separately measured at fair value, revenue should first be measured at fair value in respect of those items. To the extent that an entity is able to measure progress in providing its services, revenue should next be measured with reference to the stage of completion of the services. To the extent that an entity can estimate its progress in providing its services based upon the costs of providing those services, the entity should next apportion revenue based on the cost of delivering services. To the extent that an entity cannot reliably measure its progress in delivering its services, revenue should be recognised on a straight line basis over the period in which the services are delivered. The IFRIC did not explicitly discuss the hierarchy but observed that revenue has to be recognised on a systematic basis reflecting how the service is provided to the customer. The IFRIC assumed that in most cases this would be over the expected investment period for a portfolio of investors. However, the IFRIC stated that other systematic approaches might also be appropriate. Scope The IFRIC agreed that the Draft Interpretation should apply to all situations where a selling entity receives a one-off non-refundable upfront fee followed by ongoing services and that it should not apply to situations where an entity receives an upfront payment for the supply of goods followed by an ongoing fee for the supply of services (for example the sale of electrical goods followed by the sale of a warranty service). Consideration of the legal arrangements for fund managers The staff noted that sometimes a fund manager receives its upfront fee from an investor and its ongoing fee from a fund. It stated that concluding that the two transactions should be considered together is a fundamental step in the argument that a fund manager should defer the recognition of revenue in respect of upfront fees and that the rationale for this conclusion should be explained in the basis for conclusions. The IFRIC agreed that the fact that the owners of a unit have sufficient control over a unit to be able to end the fund manager's fees in respect of that unit (by withdrawing from the fund) may be able to provide a rationale for considering the two transactions together. The IFRIC directed the staff to prepare a draft text of a Draft Interpretation reflecting these decisions for discussion at the January 2007 meeting. Discussion at the January 2007 IFRIC Meeting The IFRIC discussed the draft text of a Draft Interpretation and related Basis for Conclusions. The discussion focused on the identification of initial and ongoing services and the consideration of the legal arrangements, for example, the situation that a fund manager receives its upfront fee from an investor and its ongoing fee from a fund. The IFRIC could not agree on a principle that would be applicable to all situations where a selling entity receives a fee and then provides an ongoing service whether or not such service is subject to the payment of further fees. The IFRIC concluded that it could not reach a consensus on this matter on a timely basis and for this reason decided to remove the project from its agenda.