A company provides services to customers under two types of contracts: one with a specified service period (time-specified contract), and the other without a specific period (non-time-specified contract). When the service is terminated for any of the following reasons—the customer proactively requests cancellation, or the customer's outstanding balance accumulates to a certain condition—the customer is obligated to pay a commitment fee.

This article aims to explore: under the above special circumstances, how the revenue arising from this commitment fee should be recognized, and when it should be recognized. Specifically, the following two different scenarios need to be considered:

Scenario 1: Customer proactively cancels and pays all outstanding amounts

If the customer proactively requests cancellation of the service, they must pay the commitment fee and simultaneously settle all outstanding balances. In this case, the company does not incur any receivables due to the cancellation (i.e., no new accounts receivable).

From a revenue recognition perspective, when the customer has paid or promised to pay all amounts and there is no significant collectibility risk, the commitment fee essentially constitutes compensation for early termination of the contract. Under revenue standards (such as IFRS 15 or ASC 606), this fee is generally treated as consideration for a contract modification or termination. If services have been partially provided, the portion of the commitment fee attributable to services already rendered should be recognized as revenue at the termination date, and the remaining portion (if any) serves as compensation for services not provided, which may need to be deferred or recognized directly in profit or loss, depending on whether the contract terms constitute a separate performance obligation.

Given that the customer has paid all outstanding amounts, there is no risk of uncollectible receivables; therefore, the collectibility of the commitment fee is high, and revenue can typically be recognized in full when received or when the right to receive it is established, provided the company has fulfilled all related obligations.

Scenario 2: Termination due to overdue outstanding balance with extremely low likelihood of recovery

If the service termination is not initiated by the customer but occurs because the aging of the customer's outstanding balance exceeds the cap set by management (e.g., one year), the company will pursue legal channels and collaborate with lawyers to collect the receivables. In this case, the likelihood of recovering the commitment fee is very low—the actual recovery rate is only 8%.

According to the prudence principle of revenue recognition, when there is significant uncertainty regarding the collectibility of consideration, an entity should not recognize revenue until it is probable that the consideration will be collected. Since historical data shows that only 8% of commitment fees are actually recoverable, the company should, based on the expected credit loss model (such as IFRS 9) or the variable consideration constraint in revenue standards, recognize only the amount that is highly probable not to result in a significant reversal.

Specifically, at the service termination date, the company should assess the fair value or expected recoverable amount of the commitment fee. If management believes the probability of recovery is extremely low, revenue may only be recognized upon receipt of cash (i.e., cash-basis recognition), or revenue may be recognized at the expected recoverable amount (e.g., at the 8% rate), with a corresponding allowance for doubtful accounts. Additionally, the uncertainty of legal proceedings should be considered, but no gains should be recognized prematurely.

In summary, the timing and amount of commitment fee recognition depend on the reason for contract termination, customer payment behavior, and the reliable estimation of collectibility. For Scenario 1, all or part of the revenue can be recognized at the termination date; for Scenario 2, strict collectibility testing must be followed, and revenue should only be recognized to the extent that recovery is probable; otherwise, it should be deferred until actual receipt.