Exploring the Different Types of Deferred Revenue

Introduction

Deferred revenue is money that has been paid but that has yet to be earned. Instead of being recorded as revenue in the period in which it was received, deferred revenue is recognized as revenue when the goods or services associated with it are delivered. Deferred revenue is frequently used in the software and services industry, where customers make advances and prepayments for services over extended agreements. While deferred revenue is a pervasive type of accounting treatment, there are actually many different types. This blog post will provide an overview of the different types of deferred revenue, and how to properly account for them.

Types of Deferred Revenue

• Subscriptions
• Contracts
• Advances
• Deposits

Deferred Subscription Revenue

Deferred Subscription Revenue is income that is received by a company initially but will not be earned and received until it meets certain criteria and accounting rules. This income is dependent on the performance of certain activities or assets, like a subscription-based streaming service, for example. Subscription revenue is different from other deferred revenue, as it is usually subject to contractual and personal renewal.

Impact of Digital Subscriptions

Digital subscriptions have a significant impact on deferred subscription revenue. With the increasing popularity of services like Netflix and Hulu, deferred subscription revenue continues to rise. Companies must take into account the long-term financial implications of digital subscriptions, considering that every turnover of the subscription will require more revenue. Additionally, subscription streaming services are seen as a more reliable source of revenue, due to their recurring nature.

Recognizing and Accruing Subscription Revenue

In order to recognize and accrue deferred subscription revenue, companies must ensure that they maintain accurate records of the subscription revenue figures. It is essential to document when a subscriber first joins and determine the total term of their subscription, including any automatic renewal periods, in order to adequately account for the revenue. It is important to note that subscription revenue should only be recognized when services have been performed and delivered, unless otherwise stated in the contract.

When subscription revenue has been recognized, the revenue should be accruable in the same accounting period. It is important to note that companies must maintain close supervision of their deferred subscription revenue, as failure to do so could lead to inaccurate financial statements.

Deferred Professional Service Revenue

Deferred Professional Service Revenue (DPSR) is a type of deferred revenue, meaning that the contract for services is not expected to be recognized as revenue until a later date. This type of deferred revenue has become increasingly common in recent years due to increased awareness of the value of long-term professional services and more business owners relying on these services to drive their business.

What is Professional Service Revenue?

Professional Service Revenue consists of services provided by qualified professionals such as lawyers, accountants, and IT consultants. This type of service is typically used by businesses to address specific business needs that are not covered by their existing resources. Professional services are billed on an hourly basis and the customer agrees to pay for those services over a defined period of time.

Different Types of Creative Professional Services

There are many different types of professional services, including creative services. Creative services involve coming up with unique ideas and strategies—design, video, programming, and writing—to help businesses achieve their goals. These services can be invaluable for businesses seeking to expand their reach or create new products or services that are outside the scope of their current offerings.

• Marketing campaigns
• Graphic design
• Website design
• Writing services
• Video and multimedia production
• Software development
• Data analytics

Deferred Licensing Revenue

Licensing revenue is all the income a business earns as a result of licensing, leasing or contracting the sale of its products or services. This income is generally based on a fixed fee or royalty-based structure, and is typically deferred until the buyer takes ownership of the product or service. Licensed products and services are the subject of many different types of contracts and agreements, and understanding the legal provisions of these contracts is key to correctly accounting for deferred licensing revenue.

Royalty-Based vs Flat-Fee Licensing

Royalty-based licensing is when the licensee pays a royalty payment to the licensor in exchange for the use of the licensed product or service. This payment is usually based on a percentage of the sales generated from the product or service. For example, a software company may enter into a licensing agreement with another software company wherein it agrees to pay a percentage of its profits gained from the licensed software. The licensor will then account for this revenue over time as the royalties are paid by the licensee.

Flat-fee licensing is when the licensee pays a fixed fee in exchange for the use of the licensed product or service. This payment is based on the one-time use of the product or service and is not related to any sales generated. For example, a business may enter into a licensing agreement with another business wherein it agrees to pay a flat fee for the right to use a software product. The flat-fee will then be recorded as deferred revenue until the licensee takes ownership of the product.

The Impact of Licensing Contracts

Licensing contracts can generally be broken down into two main types: Exclusive Licenses and Non-Exclusive Licenses. Exclusive licenses grant the licensee the exclusive right to use the product or service and prohibit the licensor from granting any other licenses. Non-exclusive agreements grant the licensee the right to use the product or service, however the licensor may grant other licenses to the same product or service. It is important to note that when a business enters into a deferred revenue contract, the contract must be reviewed to determine the type of agreement and if any restrictions are included.

The definition of deferred revenue in a licensing agreement can vary depending on the type of agreement. Generally, deferred revenue is defined as the amount of revenue to be recorded over time as it is earned from the licensed product or service. In a royalty-based agreement, deferred revenue is generally based on the royalties received from the licensee. In a flat-fee agreement, deferred revenue is typically based on the amount paid in the initial licensing contract.

Deferred Installation Revenue

For businesses, installation revenue, also known as upfront revenue, is money that a company receives before rendering services to customers. Identifying and tracking deferred installation revenue is an important part of a company's overall accounting and financial reporting, as they serve as short-term gains to the company's financial stability.

Definition of Installation Revenue

Installation revenue is a form of deferred revenue, meaning it is money that a company has earned but not yet received. Companies must recognize installation revenue when properly due and report the assets on their balance sheet and the income on their income statement. Generally, the company will recognize installation revenue in the month when they render the services to the customer.

What Services Count as Installation Revenue?

Installation revenue typically applies to services provided which involve upfront fees or deposits. Common services that generate installation revenue include software installation fees, technology installation fees, and subscription-based purchases.

• Software installation fees may include fees for setting up and configuring hardware, software, or communication networks.
• Technology installation fees refer to upfront fees for service related to setting up hardware and software, as well as providing training and ongoing support.
• Subscription-based purchases refer to services such as media streaming, cloud storage, or other services provided on a recurring basis.

Deferred Advertising Revenue

Advertising revenue is the money earned from selling advertising on a company's product, website, or service. It is a form of revenue generated through the selling of advertising space or time on the owner's media outlet. This type of revenue is important for many businesses that rely on advertising to monetize their products or services.

Definition of Advertising Revenue

Advertising revenue comes in many forms and can be direct or indirect. Direct income is generated when the business sells advertising space. Indirect income is generated when the business is paid through commissions or incentives by the advertiser or advertising network. Advertising revenue also includes clicks, impressions, video views, and other engagement metrics.

Accounting for Advertising Revenue

The recording of advertising revenue is based on the revenue recognition principle. This states that revenue should be recognized in the period in which it is earned. For advertising revenue, this means that the revenue should be acknowledged when the advertisement is published or aired.

When the advertisement will be aired in the future, the revenue should be recognized when the ad aired and not at the time of purchase. This is called deferred revenue, and it is typically recorded as a liability on the balance sheet until the revenue is realized.

The key to properly accounting for advertising revenue is tracking when and how the revenue was earned. Proper tracking will ensure that this type of revenue is properly recognized and recorded on the balance sheet.

Conclusion

Deferred revenue is revenue that has been earned but is not yet recorded in the accounting ledgers. This type of revenue, sometimes referred to as unearned revenue or upfront revenue, is recognized when it is earned and is typically reported on a company’s balance sheet. Deferred revenue helps companies understand their future cash flow and track their long-term progress. It is important for companies to properly classify and account for deferred revenue to ensure compliance with GAAP.

A Summarization of Different Types of Deferred Revenue

There are a number of different types of deferred revenue, including: customer deposits, deferred subscription revenue, and other deferred revenues. Each type of deferred revenue has different characteristics and is accounted for differently. Customer deposits are collected from customers up front and are usually refundable. Deferred subscription revenue refers to the revenue from subscription services and is recorded on the balance sheet over the period of the subscription. Other deferred revenues include deferred tax assets, and prepaid expenses. Understanding and correctly accounting for different types of deferred revenue is essential for accurate financial reporting and compliance with GAAP.

Final Thoughts on Deferred Revenue Accounting and Reporting

Deferred revenue is a crucial concept as it helps companies understand their short-term and long-term cash flow. Companies must maintain a close watch on their deferred revenue accounts to ensure that GAAP accounting principles and compliance are met. To correctly manage deferred revenue accounts and report them accurately, companies should create a system for tracking and recording all transactions related to deferred revenue accounts. Additionally, companies should consult an experienced accountant to ensure that their accounting policies and procedures are in compliance with GAAP.