USA Contra Deferred Revenue

[Grant]

Hi,

I am new here. I have some deferred revenue/revenue recognition questions:

My client raised $1 million funds through a company which is not a venture capital firm. The funds are from presale customers. The company that helps to raise the fund does not have any ownership in my client's company; instead, this company charges a commission of 5% of all the money received from customers. In addition to the commission, my client also incurs merchant fees/credit card fees.

I know this $1 million is deferred revenue since my client will be able to ship out the products at the end of 2015. My question is, should the 5% commission and the merchant fees be deferred as well? Which I will make them sit in a contra deferred revenue account.

My second question is, in order to raise this $1 million, my client launched a marketing campaign early this year and incurred $50K specific to the fund raising. Should I make this a contra deferred revenue as well?

Thanks in advance for all the help.

Grant

 

[smallbushelp]

Are you concerned more with GAAP accounting or tax reporting? Anyway, the matching principle says that you should match revenue with its related expenses so, in my opinion, if you're going to defer the recognition of the revenue, then you should also defer the recognition of the expenses. But to me, it's not contra deferred revenue but prepaid expenses (an asset account). Did the marketing campaign provide any other benefit to the company other than helping to presell product? If so, you could go either way with the cost but I would be inclined to expense it in the period in which it was incurred because the campaign has been concluded. If not, then probably best to defer it as you will the other expenses mentioned.

 

[Grant]

Thanks for your reply.

I am concerning GAAP application. I "defer" all of those cost.

Early this year they went to the CES event in Las Vegas with their pototype. I have shown that cost ($200K) as trade show expense in 2015 P&L. Now I rethink about it, can I also "defer" this cost?

Thanks,

Grant.

 

[smallbushelp]

My feeling is that the trade show was more of a marketing event than it was actually selling the product so I would expense it. That expense is not as clearly linked to the revenue as the commission and fees mentioned above are. And regarding that issue, I said earlier "prepaid expenses" but that's not really correct. Upon reflection, it's not prepaid because that implies the benefit will be realized at a later time. The correct procedure would be to "capitalize" the expenses in an other current asset account maybe called "capitalized costs."