Richieinspain
Blogger
Share this content
0
404

Deferred revenue

Deferred revenue

Hi,

I'm looking for thoughts around the following scenario;

Company received payment for sale of item and installation of item. The customer has the item and all risks/rewards of the item but installation by an engineer has not taken place yet due to the nature of the item. This was 3 years ago. The customer could still ask the company to undertake the installation. The sales contract is silent on when installation is forfeited. At present revenue on the installation sale is held as deferred revenue on the balance sheet. At what point could the company release to the p&l on the assumption that it is earned? Is there any standard which tackles this situation specifically?

Thanks

Replies

Please login or register to join the discussion.

21st Feb 2016 19:59

Pragmatic

Realistically, after 3 years, is the installation going to be called upon?

Generally, and without knowing specific details, I would say no and that the revenue should be released.

Thanks (1)
avatar
21st Feb 2016 20:38

It's a stange one

The installation would be called upon if there is an outbreak of certain diseases.  When or if this happens is anyone's guess.   

Thanks (0)
By tom123
21st Feb 2016 20:45

Day to day for us

Hi Richie,

This is day to day stuff in my company (we make machinery..) although we don't tend to have that much of a delay.

Installation can be delayed if the customer has not finished building the rest of his production line etc.

We hold 10% of the revenue as deferred, and then release on commissioning on the machine.

In your case I certainly would not want to hold back the whole item cost.

Presumably all your invoices are paid up?

Can you reasonably estimate the time and materials required for the installation?

That could help you to estimate how much to hold back - allowing your usual mark up on costs etc.

Thanks (0)
avatar
21st Feb 2016 21:15

Installation

Hi Tom,

Thanks for the response.

Yes invoices are all paid up.  I suppose the time would simply be the salary of one/two engineers for a week.

So for my understanding, say we have 5k of revenue deferred for installation and the engineers total cost would be £2000, £3000k could be released or would this not be the mark up we are applying?

 

 

 

 

Thanks (0)
By tom123
22nd Feb 2016 07:12

Look at the gross profit on the whole job

I would look at the gross profit on the whole job, and ensure you had left enough revenue behind such that when you do do the installation, you would still make the same gross profit on that part.

However, for relatively small values, (such as the amount you show) if it is only for this one peculiar sale, I would just release the whole lot.

I tend to use this gross margin method when I have 10-15 installations due at some stage over the next quarter etc.

Thanks (0)
Share this content