![]() ![]() When the product or service is eventually delivered, the amount of deferred revenue liability decreases and would become revenue on the company’s income statement. ![]() The deferred revenue in this case is considered a liability because it has not yet been earned the product or service is still owed to the customer. Initially, companies record the prepayment amount as cash on the asset side, while the deferred revenue is accounted for as a liability. When a company receives advance payments for products or services to be performed in the future – think airfare or subscription services – the payments are a contract liability known as unearned or deferred revenue. Below is a quick primer to help buyer-entities better understand deferred revenue and how to avoid common mistakes that could complicate your acquisition accounting. The measurement of these assets and liabilities, in the particular the measurement of deferred revenue, is an often overlooked element when accounting for the acquired business. GAAP requires that the contract assets and contract liabilities acquired be evaluated to determine if they should be recognized on the date of acquisition (i.e., that the contract assets or liabilities meet the definition of an asset or liability) and that they be measured at fair value. When applying the acquisition method to measure the acquired business, existing U.S. Generally Accepted Accounting Principles (GAAP). It’s important to remember that accounting rules for such transactions may have a significant impact on the financial statements of the companies that the buyer has acquired.Īfter the close of a business acquisition, the buyer must complete purchase accounting as part of the acquiree’s financial statement reporting requirements under U.S. We are seeing a surge in activity in the deal-making space including business acquisitions or combinations.
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