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Accounting for Non-Refundable Deposits

As of August 1st, we will be charging a non-refundable deposit of 10-20% of deal value. Initially, I will book this to customer deposit (liability) until we have delivered on our end. The majority of our customers who sign deals follow through on them (ie more than 90%), however, the purpose of the deposit is to ensure customers are more committed to the process (ie don't change mind once HW delivered and before services are deployed). How do I account for the non-refundable deposits for customers who choose to walk away? Is it proper to book revenue at time of churn? And would I classify it as "other income"? Thank you.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If at time of signing, the contract says non-refundable, then at a minimum I would charge unearned revenue (for that portion that is non-refundable), the other would be customer deposit.

I would then move it to revenue once the deadline of the deal has past or the customer has exercised the cancellation aspect of the contract.

John Cook
Title: Independent Consultant
Company: Consultant
(Independent Consultant, Consultant) |

It appears that you have already determined that you are under a completed contract model (i.e., you are not doing contract accounting via a percentage of completion model, nor do you believe that you have a multi-element arrangement where you should recognize revenue as items are delivered). I would suggest you review the new revenue standard, as you might find that you will have to record revenue earlier in a couple years once it goes into effect (i.e., you have distinct promises that you are delivering on).

That being said, I would caution you to not record revenue just because some period has lapsed. Just because you have received monies that are non-refundable, doesn't mean an earnings process has occurred. The question is whether value has transferred to the customer. Per SEC comments, offsetting set-up fees and recording a portion of the fee received as revenue is not appropriate as the customer probably wouldn't assign any value to that activity (ASC 605 has some good examples - one related to health club membership and non-refundable fees that you might want to look at and/or analogize to).

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