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Could you please explain why the deferred revenue is treated as LIABILITY as per below:
“Sales made which include revenue for ongoing servicing work must have part of the revenue deferred. The deferred
revenue must include the normal profit margin (25%) for the deferred work. At 30 September 2012, there are two more
years of servicing work, thus $1·6 million ((600 x 2) x 100/75) must be treated as deferred revenue, split equally
between current and non-current liabilities.”As question says “Quincy sold products for $10m” and nothing about outstanding receivables, I can assume that client paid all consideration to Quincy under agreement. But this $10m includes deferred work (your obligation under agreement) and thus deferred revenue.
Until you “earn” that revenue (actually perform all your obligations under agreement), it’s your liability – to provide services. Because client have PAID you, and you HAVEN’T yet provided all services.Even if the client hasn’t paid you, the original invoice to the client would be Dr Receivables and Cr Revenue.
But then along come the auditors and they say “But you haven’t earned all this revenue – you still have obligations for two more years” so two years’ worth of obligation including the profit element needs to be deferred – half of it for one year and half for two years.
Why is it shown as a liability? That’s an F3 question isn’t it? It’s a credit balance and a credit balance can only be either income or liability and we’ve just decided that it can’t be income….therefore it must be liability
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