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Revenue recognised or prepaid for future services?

John Paul's Profile

Hi, Our customer must complete a monthly minimum spend (eg: $2m). In month 1 they achieve $1.5m, they must pay an additional $500k (we invoice $2m). In month 2 they achieve $2.5m, we invoice them only $2m (ie: offsetting the $500k). Have we earned the $2m in month 1 as they have not achieved target, or is it considered a prepayment for future services which is contingent on them exceeding the monthly $2m target in a future period. Any reference to current or new revenue standard would be appreciated. Thanks, John Paul

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

1. It is hard to opine without other details/provisions of the contract (like is there a total contract amount?)
2. I think you made a mistake invoicing for only $2M on the second month. You should have invoiced $2.5M. What if they spent $3M? You are giving them $1M? IMO, a monthly minimum spend is just that.....a minimum spend.

John Paul
Title: Accountant
Company: TLS
(Accountant, TLS) |

Thanks Emerson.

Each month they are committed to spend a minimum of $2m and have to pay a shortfall if they spend less.

However, they can offset any cumulative shortfall against future spends that exceed target for the 36 month contract.

For example:

M1: Services = $1.5m + shortfall $500k = $2m invoiced
M2: Services = $1.5m + shortfall $500k = $2m invoiced
M3: Services = $1.5m + shortfall $500k = $2m invoiced

by month 3, there is a cumulative 'shortfall' of $1.5m.

If in month 4 they spend $8m, they can offset up to the value of any cumulative shortfall. So the invoice would be for $6.5m.

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

Based on the above, when does the contract "true-up"? Is it at the end?

Are they paying you for the invoice or are they themselves doing "self-truing"?

I have to agree with Emerson on the monthly spend interpretation. What you have created is a very complex accounting nightmare.

Pre-payments and refundable revenue.

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