Hi,
I am trying to understand how deferred revenue affects the financial statements (incl. DTA)
1) If deferred revenue decreases by 10 what happens? (assuming no DTA, margin of 100%, tax rate of 40%)
I/S: Net income increase by 6
CFS: Cash flow decrease by 4 from +6 net income and -10 deferred revenue)
B/S: Assets: -4 cash, Liabilities and equity: -10 deferred revenue and +6 retained earnings
2) If deferred revenue decreases by 10 what happens? (assuming DTA, margin of 100%, tax rate of 40%)
I/S: Net income: +6
CFS: No change to cash flow: Net income: +6, Deferred revenue: -10 (liability decrease), DTA: +4 (Asset decrease)
B/S: Assets: -4 from DTA, liabilities and equity: -4 from -10 deferred revenue +6 retained earnings
3) If deferred revenue increases by 10 what happens? (assuming no DTA, margin of 100%, tax rate of 40%)
I/S: No change
CFS: Cash flow increases by 10 from deferred revenue
B/S: Assets: +10 cash, liabilities & equity: -10 deferred revenue
3) If deferred revenue increases by 10 what happens? (assuming DTA, margin of 100%, tax rate of 40%)
I/S: No change
CFS: Cash flow increases by 6, -4 DTA +10 deferred revenue
B/S: Assets: +10 from +6 cash, +4 DTA, Liabilities & equity: +10 from deferred revenue
Have I understood it correctly? Thanks!
looks good
Thanks!
What do you mean by DTA? I’m pretty sure DTAs have nothing to do with deferred revenue. They only come up when there is a net asset write-down in an acquisition. The first one is right, pretty sure you are mistaken by the last 2 situations.
Unequivocally false.
Deferred revenue frequently, if not almost always, causes a DTA. You are taxed by the government when you collect the cash, not when you recognize it on your income statement. As a result, your tax income is going to be higher than your financial reporting income. When you decrease deferred revenue (recognize it), your financial reporting income is going to be higher than your taxable income, thus reducing the DTA.
Larger companies actually have to prepare their tax return on an accrual basis.
I dont think I/S changes bc DR is not reported as revenue yet
What are you crediting then if you aren't recognizing income? Debit to deferred revenue and credit to what?
if deferred revenue is going up by 10 then you'll:
Debit Cash by 10
Credit Def. rev. by 10
deferred revenue is a liability account.
if you reduce deferred revenue (assuming because you have provided the service/good now)
Debit Def. Rev. by 10
Credit Revenue by 10
Since the service/good has been provided, you can recognize it as revenue.
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