FAR · Select transactions · 6 practice questions
ASC 606 Upfront Fees and Stand-Ready Revenue
If activation transfers no distinct good or service, recognize its fee over the related service period, not when collected. Below: a worked calculation of monthly revenue and the remaining contract liability.
Try one first
Hint
Focus first on whether the activation activities give the customer a distinct good or service. If they do not, ask which performance obligation the upfront fee relates to.
Answer A. Under ASC 606, a nonrefundable upfront fee is not recognized immediately just because cash is collected. Because the activation tasks do not transfer a distinct good or service, the fee is part of the transaction price allocated to the ongoing service performance obligation. With service provided evenly over the 24-month contract term, the activation fee should be recognized ratably over that same period.
Why not B: This is tempting because candidates often associate nonrefundable cash receipts with immediate revenue. However, collectibility and refundability do not determine timing, the timing depends on whether consideration relates to a distinct performance obligation, which it does not here.
Why not C: This choice focuses on completing internal work, but ASC 606 requires transfer of a distinct good or service to the customer to recognize revenue. Administrative setup that is not distinct does not by itself trigger revenue for the fee.
Why not D: Although the activation is not distinct, the fee is still consideration under the contract and must be included in the transaction price. It should be allocated to and recognized over the service period rather than excluded.
Worked example
Cedar starts a noncancelable 18-month hosted-access contract on January 1. It collects a $900 nonrefundable activation fee and $400 at each month-end. Setup only creates login credentials and is not distinct. Access is provided evenly. There is no renewal option, variable consideration, or significant financing component. Calculate revenue and the contract liability at April 30, after April's payment.
| 1 | Total monthly service charges$400 × 18 months | $7,200 |
| 2 | Total transaction price$900 + $7,200 | $8,100 |
| 3 | Monthly revenue$8,100 ÷ 18 months | $450 |
| 4 | Revenue through April 30$450 × 4 months | $1,800 |
| 5 | Upfront fee recognized through April 30($900 ÷ 18 months) × 4 months | $200 |
| 6 | Remaining contract liability$900 − $200 | $700 |
At April 30, Cedar reports $1,800 of revenue and a $700 contract liability.
Check: Shortcut: $400 + ($900 ÷ 18) = $450 per month; four months earns $1,800.
Key points
- Stand-ready access earns revenue even when the customer does not use it.
- Cash received for future service is a contract liability, not revenue.
- Distinct training requires allocating the total transaction price using relative standalone selling prices.
How the exam traps you
- Recognizing the activation fee immediately because it is nonrefundable. Nonrefundable does not mean earned. Recognize the fee as the related service is provided.
- Treating completed administrative setup as a separate performance obligation. Setup must transfer a distinct good or service to qualify as a separate obligation.
- Using the comparable month-to-month price as monthly revenue. For a single obligation, use the contract's transaction price and service period, not a comparable price.
Question 2
Hint
Ask whether the company has already received consideration before satisfying its performance obligation, or instead has already performed and is waiting to bill or collect.
Answer A. A contract liability (deferred revenue) exists when a customer pays consideration before the entity transfers the related goods or services. Because the company received cash in December but the service period does not begin until January, the company has not yet satisfied the performance obligations and must report a contract liability at year-end.
Why not B: This is tempting because billing occurs after year-end, but ASC 606 focuses on transfer of control and rights to consideration. If the entity has transferred the goods and has an unconditional right to payment, it recognizes a receivable (an asset), not a contract liability.
Why not C: Although billing is deferred, the entity has already transferred goods or services (satisfied performance obligations) to date, so it would generally recognize a contract asset (unbilled receivable) for the right to consideration rather than a contract liability.
Why not D: Paying commissions is an internal cost to obtain a contract and does not create an obligation to the customer. Such costs, if capitalized under the guidance for contract costs, are recorded as an asset (contract cost asset) and amortized, not as a contract liability.
Question 3
Hint
Focus on when the performance obligation is satisfied, not when cash is collected.
Answer C. The maintenance contract is a stand-ready service satisfied evenly over 12 months. From July 1 through December 31 Harbor has provided 6 of 12 months of service, so it recognizes 6/12 × $120,000 = $60,000 of revenue. The remaining $60,000 is consideration for future service and is recorded as a contract liability.
Why not A: Collecting cash upfront does not by itself mean the performance obligation is satisfied. Revenue is recognized as Harbor provides the stand-ready service over time, so recognizing the full amount immediately is incorrect.
Why not B: This reflects a miscount of earned months (5 instead of 6). The contract runs July 1-June 30, so by December 31 six months have elapsed, making revenue $60,000, not $50,000.
Why not D: This choice treats revenue as collectible-only at contract completion. Because the customer receives benefit continuously from the stand-ready maintenance, revenue should be recognized over time as services are provided.
Question 4
Hint
Focus on the promised performance obligation: is FitPro delivering a one-time item, or standing ready to provide access over a period of time?
Answer B. FitPro's performance obligation is a stand-ready obligation to provide access to the facilities throughout the membership term. That obligation is satisfied over time rather than at a single point, and because access is provided evenly over 12 months, straight-line recognition of $100 per month appropriately matches revenue to the period services are provided.
Why not A: Tempting because cash was received and the fee is nonrefundable, but ASC 606 requires recognition when performance obligations are satisfied. FitPro still must provide access over the next 12 months, so immediate full recognition is inappropriate.
Why not C: This confuses a usage-based promise with a stand-ready access promise. The contract grants access (a right to use), not a promise tied to each visit, so revenue is recognized over the membership period even if the customer visits infrequently or not at all.
Why not D: Waiting until the end of the term incorrectly treats the service as a single completed-delivery event. Under ASC 606, when a service transfers over time, revenue should be recognized over that period rather than delayed until contract expiration.
Question 5
Hint
Focus on when the performance obligation is satisfied, not when cash is collected or how many snow events occur.
Answer A. Revenue is recognized ratably over the 12-month period: $36,000/12 = $3,000 per month. Harbor provided service for October through December (3 months) in 20X5, so recognized revenue = $3,000 × 3 = $9,000.
Why not B: Tempting if a candidate focuses on actual snow events, but the contract is a stand-ready performance obligation satisfied over time, so revenue is earned continuously even if no plowing occurred in 20X5.
Why not C: $27,000 is the remaining deferred portion of the contract after recognizing $9,000 for three months; it is not the amount earned in 20X5.
Why not D: This reflects a cash-basis shortcut (recognizing revenue on collection). Under revenue recognition rules, collecting cash upfront does not automatically equal immediate revenue when performance is to be provided over time.
Question 6
Hint
Focus first on whether the setup activity is a distinct promised good or service. If it is not, ask what performance obligation the upfront fee really relates to.
Answer D. Because the setup activity is not a distinct promised good or service, the upfront fee is part of the transaction price for the single hosted-software performance obligation. CloudServe should record the $1,200 as a contract liability at inception and recognize it as revenue ratably over the 12-month service period as the performance obligation is satisfied over time.
Why not A: Tempting because setup occurred and the fee is nonrefundable, but nonrefundable status alone doesn't determine timing. Since the setup is not a distinct performance obligation, the fee is not earned solely at inception and should be recognized over the service period.
Why not B: The payment is consideration from the customer under the contract, not merely a reimbursement outside revenue. Because the setup is not distinct, the amount remains in the transaction price and is recognized as revenue over the contract term rather than treated separately as a cost reimbursement.
Why not C: This confuses revenue recognition with cash collection. Under ASC 606, revenue follows satisfaction of performance obligations, not billing or cash receipt timing. The upfront fee is part of the transaction price and is recognized over time with the hosted service regardless of when monthly cash is collected.
Common questions
When can an upfront fee be recognized as revenue?
If the fee relates to a distinct good or service, recognize the allocated revenue when that obligation is satisfied. Administrative activation alone does not qualify.
How do you calculate monthly revenue with an activation fee?
For one evenly provided service obligation, divide the total transaction price by the service months. This equals the monthly service fee plus the upfront fee divided by those months.
Does stand-ready revenue depend on actual customer usage?
No. When the promise is access or availability provided evenly, recognize revenue evenly over the service period, even if the customer never uses it.
Watch it solved
A full CPA FAR task-based simulation on Revenue recognition, worked step by step.
FAR Simulation: Revenue Allocation, Timing and Warranties ASC 606 on YouTube
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