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Q: Accounting Question - Deferred Revenu ( Answered 5 out of 5 stars,   2 Comments )
Question  
Subject: Accounting Question - Deferred Revenu
Category: Business and Money > Accounting
Asked by: ides-ga
List Price: $25.00
Posted: 14 Nov 2005 06:46 PST
Expires: 14 Dec 2005 06:46 PST
Question ID: 592753
We sell subscription products over the Internet.  Our fees range from
$99 per year to $250,000 per year.  Where should we draw the line when
booking the revenue for any given month.  In other words, do we need
to defer all subscription revenue and book 1/12th of it per month or
can we defer only larger sales, say those over $25,000?
Answer  
Subject: Re: Accounting Question - Deferred Revenu
Answered By: wonko-ga on 01 Dec 2005 15:08 PST
Rated:5 out of 5 stars
 
According to SFAC5, "Recognition and Measurement in Financial
Statements of Business Enterprises," revenue cannot be recognized
until the earnings process is complete and the firm is reasonably
assured of payment.  You easily satisfy the second condition by
receiving cash up front for the subscription.  However, until you
provide the actual products, you cannot properly recognize revenue.  I
found one reference to an exception if the subscription is only a
minimal source of revenue compared to advertising.  However, you would
still need to defer recognizing the advertising revenue until the
magazine is actually produced.

You pay more taxes by recognizing revenue early, in addition to
improperly accounting for it, so I would suggest deferring all
subscription revenue and recognizing it only when you deliver products
to your customers.

The concept of materiality is limited to what you can get your
auditors to accept as being sufficiently minor to allow them to
certify your financial statements as being materially complete, valid
and accurate.  It does not change the fact that the item is a
misstatement.  Therefore, while booking a small number of small
subscriptions improperly may survive an audit, it is still improper
from an accounting perspective.

An example of how the accounting works:  "...[Y]our company sells
magazine subscriptions. Subscribers pay cash in advance of receiving
their monthly magazine. As you (the company) receive the cash you
defer the revenue recognition. At that point it is a liability. Let's
assume you receive       $ 4,800 in cash for forty eight months of
magazines. Debit cash $ 4,800 and credit unearned fees income $ 4,800.
As you issue the magazines, you are entitled to recognize the revenue.
Therefore, debit unearned fees income and credit fees income."
"Adjusting Entries" http://www.personal.psu.edu/faculty/m/j/mjd10/Dailey/inst_8.doc

Sincerely,

Wonko

Sources:

"Income Measurement and Accrual Accounting" by S. Das
http://www.uic.edu/classes/mba/mba501/Lec_Notes/Lect_4.doc

"Revenue Recognition" by Joshua Kennon, About.com (2005)
http://beginnersinvest.about.com/od/gaap/a/aa0605.htm?rd=1

"Adjusting Entries" http://www.personal.psu.edu/faculty/m/j/mjd10/Dailey/inst_8.doc

"Form 10-Q" Ziff Davis Holdings, Inc. (September 30, 2005)
http://www.ziffdavis.com/pdf/investor/Y13358_10Q.pdf

"Reporting materiality" Australian Educational Research Pty Ltd
http://www.abrema.net/abrema/materiality_g.html

Search terms:  subscription "revenue recognition"; magazine
subscription "revenue recognition"
ides-ga rated this answer:5 out of 5 stars
Exactly what I was looking for.  Backed by references to SFAC5 - give
me confidence.  Thank you!

Comments  
Subject: Re: Accounting Question - Deferred Revenu
From: myork28-ga on 15 Nov 2005 09:26 PST
 
In accordance with generally accepted accounting principles (GAAP),
deferred revenue should be matched with the related expense.  For
practical purposes, companies usually account for deferred revenue
proportionately over the 'life' of the subscription.  In other words,
if you charged a customer $1,200 for a 12-month subscription, $100 of
revenue would be recognized monthly.  As for your question regarding
whether the amount matters, it depends on why you are accounting for
the transaction.  For tax purposes, regardless of how small the
amount, it should be accounted for correctly.  For financial reporting
purposes, if the amount is deemed immaterial, it would not have to be
recognized proportionately over the life of the subscription.
Subject: Re: Accounting Question - Deferred Revenu
From: respree-ga on 26 Nov 2005 19:36 PST
 
I can think of two reasons why you shouldn't draw a line and treat
'all' defer all revenue, if it benefits future periods.

1.  One of the basic rules of accounting is to consistently apply
principles.  By deferring large revenue, but not deferring smaller
ones, you break that rule.

2.  By 'accelerating' the recognition of revenue, you'll also
'accelerate' the income taxes on that revenue.

Unlesss you're intentionally trying to make your P&L look artificial
strong, I would just treat all revenue consistently.

The best advice, of course, is to consult with your local CPA.

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