Deferred Revenue? Sounds Like a Contradiction to Me

Often as a financial administrator you are confronted with the determination of whether or not that check you just received is to be treated as unrestricted income, temporarily restricted income, or as deferred revenue. Even after deciding you still have this nagging feeling about the certainty of your choice.

Unlike donations or receipts of funds with timing or specific use restrictions, both of which are recognized as income as pledged or received, deferred revenue is actually a liability and is not to be confused with current period income.

A deferred revenue is created upon receipt of cash with a promise or agreement by the recipient organization to provide a service as requested. Upon completion of its responsibilities the organization will recognize income while conveying an economic benefit or exchange to the other party to the agreement.

An example would be a nonprofit organization provides health screenings to residents of medically under-served communities. The state government contracts with the organization to travel the state to bring these much needed services to the people. Terms detailing the numbers of people to be offered services are established between the state and the nonprofit provider and a per capita fee is agreed upon.

The state provides upfront money totaling $60,000. Upon receipt of the funds the organization has provided no services. Therefore, the entire amount is a deferred revenue liability. In later months, as services are provided, the liability is reduced and income is recognized in accordance with terms agreed upon by both parties. After three months the organization has earned $45,000 of the initial advance. No other payments have been received. Their deferred revenue balance is reduced to $15,000 and their service income is $45,000 for this contract.

The key takeaway for deferred revenue is whether or not the organization has a responsibility to transfer an economic benefit to the party writing the check. If so, you have a deferred revenue.

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Tuesday, April 11th, 2017