The following answers are based on the SEC’s Litigation Release No. 20470 and related press releases associated with the fraud at Bally Total Fitness Holding Corporation:
a. According to the SEC press releases and Litigation Release No. 20470, Bally fraudulently accounted for three types of revenue it received from members: initiation fees, prepaid dues, and reactivation fees.
Initiation fees: Bally fraudulently and prematurely recognized revenue from initiation fees. Part of the price of a Bally health club membership was a one-time initiation fee that was either paid in full when the member joined or was financed over a period of time, typically 36 months. Regardless of how the initiation fee was paid, accounting standards prohibit Bally from recognizing all the revenues from initiation fees immediately. Instead, accounting standards require that Bally recognize initiation fee revenue over the entire membership life. This means that for members who maintained their memberships beyond the financing period, or initia...