Ind AS 115 | Revenue Recognition for Free Trials and Subscriptions

1. Facts

Fit-life Wellness Limited, hereinafter referred to as “the company”, operates a chain of premium fitness centres that provide subscription-based gym and wellness services. To attract new members and encourage them to experience its facilities, the company runs a promotional scheme offering new customers a 2-month free trial membership.

During the trial period, customers are allowed full access to gym equipment, group fitness sessions, and digital wellness programs without any payment or contractual obligation. At the end of the trial, customers may either subscribe to a paid membership or discontinue the service without any penalty.

A customer enrols in the free trial on 1st April 2025. The standard annual membership fee charged by FitLife is Rs. 24,000, payable upfront, which provides access to services for a period of twelve months (equivalent to Rs. 2,000 per month). Initially, the customer is only entitled to the free trial for April and May, with no commitment to purchase paid services.

However, after completing one month of the trial, on 30th April 2025, the customer decides to subscribe to the annual membership and pays Rs. 24,000 in advance. As per the terms of the offer, the paid membership period begins only after completion of the free trial period, i.e., from 1st June 2025 to 31st May 2026. Consequently, the customer continues to receive services during May 2025 as part of the remaining free trial period, even though the annual subscription has already been purchased.

The management of the company faced uncertainty regarding the appropriate accounting treatment for the above transactions. The key accounting questions that arose were as follows:

(a) Whether any revenue should be recognised during the free trial period when the customer has not opted for a paid subscription and is free to discontinue the service without any obligation?

(b) Whether revenue should be recognised for the remaining portion of the free trial period once the customer opts for and pays for the annual membership before the trial ends, or whether revenue recognition should commence only from the beginning of the paid annual membership term?

Relevant Provisions

Ind AS 115 – Revenue from Contracts with Customers

Para 9 of Ind AS 115

An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;

(b) the entity can identify each party’s rights regarding the goods or services to be transferred;

(c) the entity can identify the payment terms for the goods or services to be transferred;

(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

Para 15 of Ind AS 115

When a contract with a customer does not meet the criteria in paragraph 9, and an entity receives consideration from the customer, the entity shall recognise the consideration received as revenue only when either of the following events has occurred:

(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable; or

(b) the contract has been terminated, and the consideration received from the customer is non-refundable.

Para B39 of Ind AS 115

Customer options to acquire additional goods or services for free or at a discount come in many forms, including sales incentives, customer award credits (or points), contract renewal options or other discounts on future goods or services.

Para B41 of Ind AS 115

If a customer has the option to acquire an additional good or service at a price that would reflect the stand-alone selling price for that good or service, that option does not provide the customer with a material right even if the option can be exercised only by entering into a previous contract. In those cases, the entity has made a marketing offer that it shall account for in accordance with this Standard only when the customer exercises the option to purchase the additional goods or services.