Assume that a company receives $500 cash from a customer as the initial sign-up fee for a service. In addition to the sign-up fee, the customer also is required to pay $25 per month for the service. The expected economic life of the service agreement is 50 months. The company providing the service could subcontract with a third party to provide the service for 100 months for $100, which is also the cost to the company of providing the service.
Current professional standards regarding revenue recognition would require that the sign-up fee be recognized over the 50 months the service is provided. Nonetheless, you have heard that the FASB is considering another approach to revenue recognition called the asset-and-liability approach.
Required:
Explain how this transaction would be accounted for under the FASB's asset-and-liability approach and evaluate this new approach.

Question

Quizplus · Accepted Answer

The Answer of Assume that a company receives $500 cash from a customer as the initial sign-up fee for a service. In addition to the sign-up fee, the customer also is required to pay $25 per month for the service. The expected economic life of the service agreement is 50 months. The company providing the service could subcontract with a third party to provide the service for 100 months for $100, which is also the cost to the company of providing the service.
Current professional standards regarding revenue recognition would require that the sign-up fee be recognized over the 50 months the service is provided. Nonetheless, you have heard that the FASB is considering another approach to revenue recognition called the asset-and-liability approach.
Required:
Explain how this transaction would be accounted for under the FASB's asset-and-liability approach and evaluate this new approach.

Assume That a Company Receives $500 Cash from a Customer