What is the proper accounting treatment for a signing bonus received?

If the signing bonus is non-refundable (non-forfeitable) and not contingent upon completing the multi-year contract, then it should be recognized as income when received. However, if the bonus would need to be repaid back if the mult-year obligation was not fulfilled, then yes, the signing boonus would be recognized as revenue over the term of the multi-year agreement.

It is likely an inducement for committing to a multi year agreement and should be treated as a reduction of the cost of the corresponding service or products over the life of the related contract.

You will also need to identify the "TERM" over which the amount will be amortized.

For example, assume it is a 6 year contract and the amount is only refundable over first 2 years of the contract and then becomes non-refundable over the remaining length of the contract (i.e 4 years) under any circumstances. Then in such a situation, you will amortize the amount over the first 2 years and not over the entire life of the contract.

Hence, I will suggest you to review the contract carefully and document your conclusions carefully if it is going to have a material impact on your financials.

Please feel free to contact me with any follow-up questions.

Kind regards,

Sunil Thukral, CPA, CFA

I tend to agree with the general sentiment of the earlier answers -- as with most questions about accounting, the answer is "it depends." If the signing bonus is not subject to being repaid, then I would recognize the payment as revenue currently. If is is subject to repayment, I would record it as a liability and amortize it over the time that the repayment threat looms.

The answers suggesting that whether the bonus is refundable or not are missing a key element: is the bonus connected to the multi-year contract or is it independent? Since you've described the bonus as one element in the contract, US GAAP requires you to recognize the bonus ratably. For tax purposes, however, you'll likely have to recognize it in full during the year in which the bonus is received.

I was surprised by the various responses (recognize over the life; recognize immediately; reduce cost). I recommend reviewing Ernst & Young's FRD on Revenue Recognition for your specific facts and circumstances. You can obtain it free on their web-site (www.ey.com and then type FRD in the search box). They will ask you for your name and e-mail address.

For public companies, the SEC addresses the issue clearly in SAB Topic 13. f. Question 1. It is very rare that the upfront fees are recognized immediately as revenue. The Staff presumes revenue should be recognized over the life of the contract. It does not matter whether the fees are refundable (similar to a warranty obligation) or non-refundable.

ASC Topic 605-25-55 provides additional examples (for public and private companies). Examples 1 (cell phone activation - simple) and 6 (outsourcing services - complex) are very good and clearly indicate upfront fees are recognized over the life of the contract as revenue.

And as always, technical accounting questions are always dependent on the specific facts and circumstances, and often will require some judgment. The above references are the general principles to be applied.

And if it were revenue (from a client), it is not recognizable just because it is non-refundable. It would need to be a separable element with standalone value, which is not the case with a signing bonus.

Experience has taught me to always take the conservative approach. Therefore, I would recognize it ratably over the life of the contract.

Wayne has it right. The matching principle is the issue here. Match revenues and expenses.

Recognize the amount over the life of the contract.