Deferred revenue
Deferred revenue is consideration received or billed in advance for goods or services not yet transferred. ASC 606 and IFRS 15 call it a contract liability but permit other descriptions. It decreases as revenue is recognised, and for a ratable subscription the balance should reach exactly zero at the end of the term.
Standard references
- ASC 606606-10-45-2 and 45-5 (45-5 permits other descriptions)
- IFRS 15paragraphs 106 and 109
- Ind AS 115paragraphs 106 and 109
Worked example
Illustrative: $100,000 prepaid for a 36-month subscription, recognised ratably by month.
- $100,000 / 36 = $2,777.777… per month.
- Rounding every month up to $2,777.78 recognises $100,000.08, eight cents more than the contract.
- Instead, recognise $2,777.77 for months 1–35 ($97,221.95) and let month 36 absorb the remainder: $100,000 − $97,221.95 = $2,778.05.
Result: Deferred revenue steps down each month and is exactly $0.00 after month 36.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Rounding each period independently, so the deferred balance never quite clears.
- Recognising on the billing schedule instead of the pattern of performance.
- Not splitting current and non-current deferred revenue for multi-year prepayments.