A non refundable upfront fee is usually not revenue when it is charged. Under the revised Section 23 of FRS 102, unless the fee pays for a distinct good or service delivered at the start, it is an advance payment for the later service and is spread over the period that service is provided, which can run beyond the first contract term if the customer gets a valuable renewal right.
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What counts as a non refundable upfront fee?
Paragraph 23.29 of FRS 102 describes fees charged at or near the start of a contract, giving joining fees in health club membership contracts, set up fees in some service contracts and initial fees in some supply contracts as examples. IFRS 15, on which the new section is based, adds activation fees in telecommunication contracts (paragraph B48). Other common examples are onboarding fees for software subscriptions, registration fees for training courses and initial fees for a managed service.
The new Section 23 applies to accounting periods beginning on or after 1 January 2026 (paragraph 1.37(b)). Before that, many businesses took these fees to revenue when they were invoiced on the basis that they could not be refunded. The fact that the fee is non refundable does not decide the timing under the new model; what decides it is what the customer receives for it. For the model as a whole see our guide to the five step revenue model.
Does the fee pay for something the customer receives at the start?
This is the key question. Paragraph 23.30 says that in many cases, even though the fee relates to an activity the business must carry out at or near the start to fulfil the contract, that activity does not transfer a promised good or service to the customer. Paragraph 23.20 confirms that set up activities and administrative tasks that transfer nothing are ignored when identifying performance obligations. Enrolling a gym member, creating a customer account or connecting a phone line are typically activities of this kind: the customer gets nothing it could use on its own until the main service starts.
If the fee does relate to the transfer of a good or service, paragraph 23.30 requires the business to consider whether that good or service is a separate performance obligation. Paragraph 23.21 treats it as distinct if the customer can benefit from it on its own or with readily available resources and the promise is separate from the other promises in the contract; paragraph 23.22 says goods or services regularly sold separately pass the first limb. Training the customer’s staff, sold separately elsewhere, may be a distinct service. Our page on identifying performance obligations covers these tests in more depth.
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What happens when the fee is an advance payment?
Paragraph 23.30 says the fee is then an advance payment for future goods or services and is recognised as revenue when those goods or services are provided. On receipt the business records a contract liability (paragraph 23.125) and releases it to revenue as the service is delivered. As an illustration only, a £50 activation fee on a 24 month airtime contract with no renewal benefit would normally be released at about £2.08 a month over 24 months.
Where the fee does pay for a distinct service delivered at the start, the total transaction price, including the fee, is allocated between that service and the ongoing service on the basis of their relative stand alone selling prices (paragraph 23.65). The fee itself is not simply matched to the first service.
When does the period run beyond the contract term?
Paragraph 23.30 says the recognition period extends beyond the initial contract period if the customer is granted a material right. Under paragraph 23.31 an option to buy more goods or services is a separate performance obligation if it gives the customer a material right it would not receive without entering into the contract; paragraph 23.32 lists contract renewal options as one example. A member who can renew without paying the joining fee again, when new members must pay it, may hold such a right.
If so, the customer is in effect paying in advance for the renewal periods, and paragraph 23.33 recognises that revenue when the renewal services are provided or when the option expires. Rather than estimating a stand alone price for the renewal option, paragraph 23.34 allows a practical alternative for renewals on similar terms: allocate the total expected consideration across all the goods or services expected to be provided, including expected renewal periods. Paragraph 23.35 explains the resulting amount allocated to the option.
What does a worked example look like?
Illustration only. A gym charges a £60 joining fee and £30 a month on a 12 month contract. After 12 months members can continue at £30 a month without paying the joining fee again. Experience shows the average member stays 24 months.
- Joining a gym transfers no service in itself, so the £60 is an advance payment (paragraph 23.30).
- The renewal at the same monthly price, without a fresh joining fee, is judged to give a material right.
- Using paragraph 23.34, total expected consideration is £60 plus 24 months at £30, which is £780, spread over 24 expected months: £32.50 a month.
| Period | Cash received | Revenue | Contract liability at end |
|---|---|---|---|
| Month 1 | £90 | £32.50 | £57.50 |
| Months 1 to 12 | £420 | £390 | £30 |
| Months 13 to 24 | £360 | £390 | Nil |
In effect the joining fee is released at £2.50 a month over the expected 24 month membership instead of being taken as income in month one. If the gym had judged that no material right existed, the £60 would be spread over the first 12 months only, at £5 a month.
Does the business have to adjust for the time value of money?
Usually not. Paragraph 23.59 says that where payment is received in advance an entity may adjust for the time value of money, which makes it optional under FRS 102. Paragraph 23.60 also removes the need where the gap between payment and performance is expected at the start to be 12 months or less. Paragraph 23.139 requires disclosure if the paragraph 23.60 option is used. The FRC describes the absence of a compulsory financing adjustment on advance payments as one of the simplifications compared with IFRS 15.
What about the costs of setting the customer up?
The fee and the cost of the set up work are assessed separately. Deferring the fee does not automatically allow the set up cost to be deferred. Costs are capitalised only if they meet paragraph 23.117, explained in our page on costs to fulfil a contract. If they qualify, the resulting asset is amortised over a similar period to the deferred fee; if they do not, they are expensed even though the related fee is deferred.
Where customers pay upfront for a bundle of future sessions that some never use, paragraphs 23.129 and 23.130 on unexercised rights, often called breakage, decide when the unused part becomes revenue.
How does this show in the tax computation and on transition?
Section 46 of the Corporation Tax Act 2009 calculates trading profits in accordance with generally accepted accounting practice, so deferring fee income under the new Section 23 normally defers the taxable profit too. On first applying the revised section, paragraph 1.61 allows either full retrospective restatement or the cumulative effect approach, under which comparatives are not restated and only contracts not completed at the date of initial application are adjusted (paragraph 1.62). A change of accounting policy is a change of basis under section 180, and section 181 brings the adjustment in on the first day of the first period of account on the new basis. For subscriptions more generally see our page on subscriptions and licences.
What mistakes come up most often?
- Recognising the fee on signing because it cannot be refunded.
- Treating enrolment, account creation or connection as a performance obligation.
- Spreading over the minimum contract term when a material renewal right extends the period.
- Deferring set up costs to match the fee without testing them against paragraph 23.117.
- Ignoring the stand alone selling price allocation where the fee does buy a distinct service.
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Related Accountapedia entries
- Bill and hold sales: when to recognise revenue
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- Tax on director fees from an overseas company
- Contingent fees for tax work
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- legislation.gov.uk: Eur 20161905 adopted en
- legislation.gov.uk: Act 2009 c. 4, section 46
- legislation.gov.uk: Act 2009 c. 4, section 180
- legislation.gov.uk: Act 2009 c. 4, section 181
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.