Consider the following example:

The staff notes that the period over which the activation fee will be recognized depends on whether the activation fee provides the customer with a material right with respect to renewing Entity’s services. When determining whether a nonrefundable upfront fee provides a material right, Entity would consider both quantitative and qualitative factors. For example, Entity would consider whether the renewal price that Customer will pay (that is, $100 per month) compared with the price that a new customer would pay for the same service (that is, $150, consisting of a $50 activation fee and $100 monthly service) provides Customer with a material right. Entity also would consider the availability and pricing of service alternatives (for example, whether Customer could obtain substantially equivalent services from another provider without paying the activation fee). Entity’s average customer life also might be an indication of whether the activation fee provides a material right. That is, an average customer life that extends well beyond the one-month contractual period might be an indication that the activation fee incentivizes Entity’s customers to continue services because those customers would not incur an activation fee that they may otherwise incur if they switch service providers.

If Entity concludes that the activation fee provides a material right, the fee would be recognized over the service periods during which Customer is expected to benefit from not having to pay an activation fee upon renewal of service. Determining the expected period of benefit often will require judgment.

Conversely, if Entity concludes that the activation fee does not provide the customer with a material right, the activation fee is, in effect, an advance payment solely on the contracted services (for example, the one-month contract term). Consequently, Entity would recognize the transaction price (that is, $150 comprised of the service and activation fees) as revenue as those services are provided in accordance with paragraph 606-10-55-51.