Deferred revenue! How to account for it?

November 17, 2023
by a searcher from Washington University in St. Louis in Chicago, IL, USA
Situation- The business will have deferred revenue of, let’s assume, 100k. The business paid a 10% commission to staff that sold those packages to clients. The business also has a 5% marketing cost overall. This is not a subscription-based business, and therefore, the revenue is recognized as the services are rendered. There is a 12-month expiration policy for clients to use the service they bought or loose it. It’s non refundable upon sale. Historically, 20% will never redeem it.
Owner proposed- will leave inventory to cover the consumable cost + direct labor cost of providing the services post closing. (Preposterous proposal)
Are there standard practices or accounting principles I can leverage in such scenarios, or does this fall under Wild West territory?
This would be debt on balance sheet. If I rendered the services, I should recognize the revenue and the profits related to it. Or do I have to actually use “fair value of the obligation”?
or to make it simple
Deferred revenue- direct sales cost= debit to new owner at closing.
Thoughts?
from The University of Chicago in Chicago, IL, USA
The challenge is not just the logic, but how to convince the buyer, the seller and their respective advisors. Also, one has to address the EBITDA impact.
from Babson College in Boston, MA, USA