USA Deferred Royalty Payments- Can you recognize revenue??

[TXStaffAccountant]

Hello,

We are deferring royalties for brand partners to help provide support during COVID. When deferring these payments, are we to not recognize revenue or can we recognize revenue if we are for certain there is a 90%+ collectible?

I tried searching the 606 standard but I couldn't find exactly what I was needing.

Thanks to anyone willing to assist!

 

[kirby]

Are you issuing invoices and telling the partner not to pay or are you not issuing invoices at all now?

 

[TXStaffAccountant]

Are you issuing invoices and telling the partner not to pay or are you not issuing invoices at all now?

Yes, I’m still submitting invoices but they’ve been notified that payment isn’t required until 2021.

 

[kirby]

So by 12/31 your financials will show 6 months of past due receivables? If you have loans payable to a bank they are going to be livid.

Anyway, consider that had these originally been set up to pay semiannually you would have priced them higher for the interest and the risk. So, an argument can be made to continue accrual but you need to also calculate lost interest (interest rates are low currently so this should not have a large effect) and record the interest loss as an adjustment to income and also adjust the receivables loss provision upward.

 

[Kat Maple]

Hi

I think I would suggest her if the company formally re-writes the agreements to make the payments semiannually and not monthly for a limited period then the receivables will not be reported as past due at 12/31/20 until 6 months passes instead of past due immediately after each month end if they remain as being due monthly. And yes that would still mean the kind of adjustments Kirby described - it just addresses the past due problem.

Hope that helps

Kat

 

[Werner Reisacher]

This scenario sounds like a "dream come true" for a salesman. Buy now, and don't worry about paying. Any graphic display of the probability to collect funds after 30 days displays the classic "hockey stick" shape.
This is unfortunately the trap 70% of the restaurant start-up businesses fall into. Customers pay cash - sales tax, payroll deductions, and the IRS can wait. But the moment a major repair is necessary, game over.

 

[TXStaffAccountant]

So by 12/31 your financials will show 6 months of past due receivables? If you have loans payable to a bank they are going to be livid.

Anyway, consider that had these originally been set up to pay semiannually you would have priced them higher for the interest and the risk. So, an argument can be made to continue accrual but you need to also calculate lost interest (interest rates are low currently so this should not have a large effect) and record the interest loss as an adjustment to income and also adjust the receivables loss provision upward.

So by 12/31 your financials will show 6 months of past due receivables? If you have loans payable to a bank they are going to be livid.

Anyway, consider that had these originally been set up to pay semiannually you would have priced them higher for the interest and the risk. So, an argument can be made to continue accrual but you need to also calculate lost interest (interest rates are low currently so this should not have a large effect) and record the interest loss as an adjustment to income and also adjust the receivables loss provision upward.

Whats the purpose behind reporting an interest lost if this is unrelated to the loan? That maybe a silly question but I’ve seriously never done that before. This is only being done for one of our franchisees so it’s an immaterial amount but all and all will be deferred. Currently our leadership has decided to book the deferred portion to deferred AR while accounting for the revenue as well and they are not concerned with adjusting the payment terms.

 

[TXStaffAccountant]

So by 12/31 your financials will show 6 months of past due receivables? If you have loans payable to a bank they are going to be livid.

Anyway, consider that had these originally been set up to pay semiannually you would have priced them higher for the interest and the risk. So, an argument can be made to continue accrual but you need to also calculate lost interest (interest rates are low currently so this should not have a large effect) and record the interest loss as an adjustment to income and also adjust the receivables loss provision upward.

Also another question, why would we adjust the receivables loss provision if we’re nearly 100% certain that the funds will be collected?

 

[kirby]

This is only being done for one of our franchisees so it’s an immaterial amount
OK then let's leave it alone.

why would we adjust the receivables loss provision if we’re nearly 100% certain that the funds will be collected?
Being nearly 100% certain is a wonderful thing.
Yes all marriages will last forever - except US divorce rate is about 50%

on the business side, due to current conditions the global small business failure rate is estimated at 25%
Also, your management might have not peeked at the WSJ lately and learned we are in a recession. Not to mention the 13.3% unemployment rate.

But I don't advise that you disagree with them.