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

accounting for signing bonus

Our company is to receive a signing bonus for entering into a multi-year contract with a vendor.  When do we recognize the signing bonus received? Do we take it all at once or over the life of the contract?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

GAAP only allows for signing bonuses to be capitalized and amortized over the life of the transaction. Thus 6 years.

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

For those of you looking for info on accounting for expense associated with paying a signing bonus, Proformative has this discussion:

"When do you accrue / recognize expense associated with a signing bonus?"

https://www.proformative.com/questions/when-do-you-accrue-recognize-expense-associated-signing-bonus

Proformative also offers 400+ business courses with free CPE, many on Accounting.

Enjoy!

Best... Sarah

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

For those of you looking for info on accounting for expense associated with paying a signing bonus, Proformative has this discussion:

"When do you accrue / recognize expense associated with a signing bonus?"

https://www.proformative.com/questions/when-do-you-accrue-recognize-expense-associated-signing-bonus

Enjoy!

Best... Sarah

Craig Weiner
Title: CFO/Corporate Controller
Company: in-between
(CFO/Corporate Controller, in-between) |

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.

robert damon
Title: CFO
Company: transition
(CFO, transition) |

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.

Topic Expert
Sunil Thukral
Title: Controller/Technical Accounting Advisory..
Company: Consultant
(Controller/Technical Accounting Advisory/ SEC Reporting, Consultant) |

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

Steve Kahn
Title: Controller
Company: Carolina Lumber & Supply Co.
(Controller, Carolina Lumber & Supply Co.) |

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.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

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.

Michael Beland
Title: Dir Acctg Policy & Research
Company: PPD
(Dir Acctg Policy & Research, PPD) |

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.

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

Perhaps just me, but the question indicates that the "bonus" is from a vendor not a client. Appears to be a kickback to secure future business.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Ken; great catch! So, not revenue at all.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

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.

Robert Rochester
Title: VP & CFO
Company: Edcor Data Services LLC
(VP & CFO, Edcor Data Services LLC) |

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

Philip Russell
Title: CFO
Company: FCB Homes
(CFO, FCB Homes) |

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

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Recognize the amount over the life of the contract.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Yes; in either case (be it revenue or contra expense), for GAAP purposes you want to accrue the the amount and recognize the impact ratably over the life of the related agreement. Again, per Ken, this sounds like Contra Expense...almost like a prepaid discount? So, don't shove it into revenue if it isn't revenue.

And....
Not mentioned here, but in these deals do watch out, as the IRS takes a different view on occasion. If you are a cash-basis taxpayer, then you are not allowed to recognize it ratably. Instead you need to take it in the current period (thus the "cash" terminology), which could have a significant impact on your tax liability.

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