Question

Video Streaming Services (e.g., Netflix and Hulu) provide internet subscription services streaming TV and movies.

For a fee, subscribers can instantly watch unlimited TV shows and movies streamed over the internet on their TVs, computers and mobile devices.

How should these firms recognize subscription revenues in accounting?

Answer 1

Revenues should be recognised in books of account as per revenue recognition principle. As per Revenue recognition principle revenue is recognised in books based on when the product is delivered or service obligation is performed. Hence the receipt of cash from the customer is not material in deciding the time at which revenue should recognised.

The online video streaming service companies offer unlimited movies on a subscription basis over a period of time for example: monthly plan, annual plan, etc. Revenue should be recognised for the month when service obligation is performed that is the customer is given right to access the database to watch movies on monthly basis. Any advance receipt of subscription money for future service obligation to be performed should be recognised as unearned revenue in the books and should be recognised as subscription revenue over the period of time for which the subscription revenue is received. For example 12 month subscription received in advance should be accounted as revenue over the 12 month period.