Question: Assume that a company receives $600 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 $200, which is also the cost to the company of providing the service.
Previous professional standards regarding revenue recognition would have required that the sign-up fee be recognized over the 50 months the service is provided. Nonetheless, you have heard that the FASB has 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. Cite the SFAS standard that relates to this aspect of revenue recognition.