Accounting treatment of Entrance Fee for Clubs – ICAI

A. Facts of the Case

An Association (hereinafter referred to as ‘Association’ or ‘club’) was registered under the Karnataka Societies Registration Act, and regulated by the Memorandum of Rules and regulations framed thereunder. Association was promoting golfing activities and it prepared its financial statements in accordance with Accounting Standards issued by ICAI.

• The Association received applications for membership along with ‘one-time payment’ of entrance fee. Total number of members was defined and the selection of membership was also regulated on periodical rests. Till the application was converted to confirmation of membership, the entrance fee received was treated as liability under the head ‘Returnable Advance-Entrance Fee’. Upon confirmation of membership, this amount was capitalized and transferred to the Capital Fund and declared in the return of income as capital receipt for the relevant assessment year. In the event of a Member Elect/ Associate Elect not being confirmed, the entrance fee collected would be refunded after deducting all amounts due to the Club.
• The candidate after the interview process was either declared elected as Member Elect/Associate Elect, in which case he had to fulfill certain requirements to be confirmed as a Member/Associate. The candidate enjoyed rights and privileges as per his category under Rules only after final confirmation.

B. Questions

• Whether the one-time entrance fee received in advance from an applicant ‘before’ he was considered for membership (this was refundable in case the application was not considered for membership) be considered as an income of a revenue nature or a capital nature.
• Whether the one-time entrance fee received from an applicant ‘after’ he was considered for membership be considered as an income of a revenue nature or a capital nature.

C. Expert Advisory Committee Opinion

The EAC noted that the Association was under an obligation to refund the entrance fee received in advance in case the membership was not confirmed or rejected, resulting in outflow from the enterprise of resources embodying economic benefits. Therefore, the entrance fee received in advance met the characteristics of liability till the decision whether to grant membership was taken.

(i) The admission fee received in advance was a liability.
(ii) An assessment was required to be made by the Club/Association by carefully examining its Rules, Bye-laws etc., as to what extent the entrance fee received from the various membership categories provided rights in the capacity as Owners. In case it was determined that entrance fee from any membership category involved a combination of ownership and revenue transaction, a portion of the entrance fee should rationally and systematically be recognized immediately as a contribution of ‘Capital from an
Owner’ / ‘Corpus’ and a portion should be recognised as revenue on a systematic and rational basis having regard to the timing and nature of all services provided.

The above opinion was affirmed by ICAI Expert Advisory Committee.

Bijhon Bordoloi, Audit Associate, SW India