Deferred revenue is money a customer has paid, or owes, before the company has delivered the goods or services. Until delivery it is a liability, not income. IFRS 15 calls it a contract liability, and it becomes revenue as the company meets its obligations to the customer.
What is deferred revenue?
Deferred revenue, also called unearned revenue, arises when the customer pays first and the company performs later: an annual subscription billed upfront, an advance on a project, a maintenance contract paid for the year. The company owes the customer the service, or the money back, so the amount sits on the balance sheet as a liability.
IFRS 15 uses the term contract liability: the obligation to transfer goods or services to a customer for which the entity has received consideration, or for which an amount is due (paragraph 106). Paragraph 109 allows other descriptions in the statement of financial position, so many companies still label the line deferred revenue.
How is deferred revenue accounted for?
- Record the liabilityWhen the customer pays, or the amount falls due, before you deliver, credit deferred revenue rather than revenue.
- Work out when you deliverUnder IFRS 15, revenue is recognised when, or as, control of the promised good or service passes to the customer (paragraph 31). A service consumed as it is provided, like a subscription, is usually recognised over time (paragraph 35).
- Release it as you performEach month, debit deferred revenue and credit revenue for what you delivered in that month.
- Reconcile to the contractsAt month end the balance should equal the undelivered part of open contracts. An old balance with no movement usually means a contract ended, was cancelled or was never set up for release.
What does deferred revenue look like in the books?
The reverse case is a contract asset: the company has delivered but its right to payment still depends on something other than time, such as finishing the next stage (paragraph 107). Once only time stands between the company and payment, it is a receivable (paragraph 108).
Why does deferred revenue matter for finance teams in the GCC?
Advance payments on projects and contracts, and subscriptions billed upfront, are common across sectors. Booking them straight to revenue overstates the month the cash arrives and understates every month after it. A deferred revenue schedule, reconciled at each month-end close, keeps revenue in the months it is earned and shows the board how much work is already paid for and still to deliver. For the full model, see IFRS 15.
Questions people ask
Is deferred revenue a liability or an asset?
A liability. The company owes the customer goods or services, or a refund. Its mirror image on the buyer’s side is a [prepaid expense](/glossary/prepaid-expenses), which is an asset.
What is the difference between deferred revenue and accrued revenue?
Deferred revenue is cash in before delivery, so a liability. Accrued revenue is delivery before the invoice, so an asset, presented as a receivable or a contract asset depending on whether the right to payment is unconditional.
Does deferred revenue affect cash flow?
The cash arrives at the start, so deferred revenue improves cash before profit catches up. That is why a growing subscription business can show more cash than its profit suggests.
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