Turnaround at Bally Total Fitness
Case Overview
⚫A second revenue recognition case to compare and
contrast with the Boston Chicken Case.
⚫New management promotes installment membership
–Significant provision for loan losses on receivables
–Revenues are deferred and recognized ratably over the life of
membership contracts
Overview of Business
⚫The largest and only nationwide operator of fitness
⚫Initial membership fee can be financed for up to 36
months, and new management are heavily promoting
this option (aiming for 90% in 1999)
⚫Large losses in 1996 and 1997 turned to healthy profits
in 1998.
membership programs
⚫Strategic clustering in major metropolitan areas increases
access to target customers and facilitates sale of all-club
memberships
⚫Brand identity associated with ‘Bally’ service mark
–Localized competitors can better serve needs of local
community
⚫Fitness craze is a fad
⚫High operating leverage due to fixed costs associated with
fitness centers
⚫High interest rates
⚫Low cost of default (suspend membership)
⚫Very pro-active in limiting defaults
–Electronic payments
–“Aggressive” collection efforts
–Check the web page below for examples (warning: may
contain some unsavory language)
http://www.mwns.com/btf/
⚫Regulatory and legal risks
Bally’s Accounting for Financed
memberships
⚫Costs associated with membership origination are also
capitalized and deferred
⚫Finance charges are accrued as earned using the
sum-of-the-months digits method, which approximates
BFT Deferral Basis Cash Basis
•Revenue Recognition Over Contract
Interest Membership Total Membership
Income Revenue Revenue
50 166 216 200
Accounts Receivable = 497 [no entry required]
Deferred Revenue = 497
GAAP Revenue Recognition Criteria
⚫Revenue cannot be recognized until:
⚫An exchange transaction has taken place
consistent with GAAP (assuming that they are
being correctly applied)