Deferred Revenue Haircut Journal Entry

The valuation of deferred revenues and the implied haircut continue to be a controversial topic that can have an unexpected impact on a company s post transaction financial statements.

Deferred revenue haircut journal entry. A deferred revenue journal entry is needed when a business supplies its services to a customer and the services are invoiced in advance. Haircut to the target company s book value of the deferred revenues. The reason is that the amount deferred under the revenue recognition rules is not intended to represent the fair value of the performance obligation. It is the revenue that the company has not earned yet.

In simple terms deferred revenue means the revenue that has not yet been earned by the products services are delivered to the customer and is receivable from the same. Likewise the company needs to properly make the journal entry for this type of advance payment as deferred revenue not revenue. For example suppose a business provides web design services and invoices for annual maintenance of 12 000 in advance. Changes to revenue recognition rules will likely result in the continuing evolution of valuation approaches and the resulting haircut to deferred revenue.

As you fulfill the obligations of that subscription you will recognize the revenue ratably over the contract term. In this example we will recognize 1 000 a month over a twelve month period. The process of determining the fair value of the deferred revenues can result in a significant downward adjustment i e. Deferred revenue journal entry overview.

Bvwire issue 179 1 august 2 2017. Deferred revenue gets a haircut under asc 805 but how much. In this video on deferred revenue we will look at definition examples and deferred revenue journal entry in accounting. In accounting terms deferred revenue is simply the cash received in advance of recognizing revenue because the seller still needs to fulfill on the deal such as deliver the goods or perform some service.