Deferred Revenue (also called Unearned Revenue) is the liability recorded when a company receives payment before fulfilling its contractual obligations. It indicates cash collected for future products or services not yet delivered.
Why is Deferred Revenue Important?
Deferred Revenue is important because it:
Reflects Customer Obligations: Shows the amount of revenue not yet earned and services still owed to customers.
Impacts Cash Flow vs. Earnings: Increases cash without immediately boosting recognized revenue, separating cash collection from revenue recognition.
Indicates Business Model: High deferred revenue often signals subscription-based or long-term contract businesses.
How is Deferred Revenue Calculated?
Deferred Revenue is reported on the balance sheet under current and/or non-current liabilities and calculated as the sum of advance payments received for unperformed work:
Deferred Revenue = Advance Payments for Goods/Services − Revenue Recognized to Date
Where:
Advance Payments: Cash received upfront from customers.
Revenue Recognized: Portion of the service or delivery obligations already fulfilled.
Additional Considerations
Revenue Recognition Standards: Companies follow principles (e.g., IFRS 15 / ASC 606) to recognize deferred revenue as performance obligations are satisfied.
Current vs. Non-Current Classification: Portion expected to be earned within 12 months is classified as current; remaining as non-current.
Disclosure Requirements: Notes should detail significant contract terms, timing of recognition, and reconciliation of opening and closing deferred revenue balances.