Q: Is deferred revenue a bad thing?
A: Usually not. Although it is a liability, it is normally settled by delivering a product or service rather than by paying cash. For subscription businesses, a growing balance is often a sign of healthy demand.
Deferred Revenue (Unearned Revenue)
Metadata
- Category
- Balance Sheet
- Units
- Currency
- US-GAAP elements
ContractWithCustomerLiabilityCurrentContractWithCustomerLiabilityNoncurrentDeferredRevenueCurrent- Reference
- ASC 606 (contract liabilities); Regulation S-X Rule 5-02.20 (Other current liabilities)
- Source
- Reported in SEC EDGAR filings (US-GAAP XBRL taxonomy)
Definition
Deferred revenue is cash a company has received, or has an unconditional right to receive, for goods or services it has not yet delivered. Because the company still owes the customer something, the amount is recorded as a liability, not revenue. It moves into revenue as the company fulfills its obligation.
Common examples are annual software subscriptions billed up front, gift cards, maintenance contracts, and customer deposits. The part expected to be earned within a year is a current liability, and the rest is noncurrent.
Details
Under ASC 606, Revenue from Contracts with Customers, the formal accounting term is a contract liability, and XBRL filings usually tag it as ContractWithCustomerLiabilityCurrent and ContractWithCustomerLiabilityNoncurrent. Some companies still use the older DeferredRevenueCurrent element or label the line "unearned revenue." All of these describe the same obligation. ASC 606 also requires companies to disclose how much of each period's revenue came out of the opening deferred-revenue balance, which lets investors see how much of current sales was already booked in advance.
Regulation S-X Rule 5-02.20 requires any item within other current liabilities that exceeds five percent of total current liabilities to be stated separately. That is why subscription and contract businesses usually show deferred revenue on its own line.
For analysts, deferred revenue is a forward-looking signal. A growing balance usually means customers are committing to future purchases faster than the company is recognizing revenue, which supports future sales. Because the cash arrives before the revenue, increases in deferred revenue also raise operating cash flow above net income.
FAQ
Q: How does deferred revenue affect cash flow?
A: An increase in deferred revenue adds to cash from operating activities, because the company has collected cash it has not yet reported as revenue. A decrease has the opposite effect.
Q: What is the difference between deferred revenue and accrued revenue?
A: They are opposites. Deferred revenue is cash received before the work is done, so it is a liability. Accrued revenue, often reported as a contract asset or unbilled receivable, is work done before the customer is billed, so it is an asset.
Related Terms
In the metrics library: Deferred Revenue to Revenue
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