About
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Careers
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Contact
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Services Industries Knowledge Center People

About Our Services

We offer tailored solutions — whether private company or owner; public or private fund, adviser or fund service provider; or Fortune 1000 enterprise. Learn how we can help you.

Learn More

Assurance Services

Employee Benefit Plan Audits Internal Controls Investment Company Audits Private Company Audits SOC Readiness & Compliance

Tax Services

Federal Tax Planning & Compliance High Net Worth & Wealth Transfer International Filings & Structuring Investment Company Tax State & Local Tax Tax Credits & Incentives Transaction Tax Planning

Advisory Services

Business Valuations Data & Insights Digital Finance Solutions IT Strategy & Implementation M&A Advisory Outsourced Accounting Solutions Risk Assurance & Advisory Transaction Services Turnaround & Restructuring

Our Industry Expertise

Our industry experience means you can find professionals who speak your language and bring earned insights to the table. Learn how we can help you.

Learn More

Key Industries

Digital Assets Investment Companies Manufacturing Private Companies Private Equity Real Estate & Construction Technology & Life Science
VIEW THE COMPLETE LIST

Knowledge Center

Our team wants to help your team stay up to date. Browse our thought leadership, events and news for insights and a point of view on business-critical topics.

Learn More

Insights

Browse valuable articles and publications our experts have written to help you and your organization answer key questions — and consider new ones.

Read Our Insights

Events

Join us in person and online for events that address timely topics and key business considerations.

Explore Our Events

News

Find out what is happening at Cohen & Company, from industry recognitions and growth updates, to where we are contributing to important media stories.

Read Our News
People
Foundational Principles In the Community Diversity, Equity & Inclusion Technical Excellence Alumni TIAG Membership
Why Cohen & Company Our Culture Total Rewards & Benefits Intern & Entry Level Opportunities Experienced Opportunities
Akron, OH Baltimore, MD Chicago, IL Cleveland, OH Detroit, MI Milwaukee, WI New York, NY Philadelphia, PA Pittsburgh, PA St. Clair Shores, MI Youngstown, OH
Client Portal
Back to Insights

Where Did the Deferred Revenue Go in Your Acquisition?

by Beth Reho

March 23, 2021 M&A Advisory, Transaction Services, Private Company Audits, Private Companies

Acquiring a business means going through the process of revaluing the acquired assets and liabilities at the acquisition date fair value. And if you acquired deferred revenue as part of the acquisition, that too must go through this revaluation process. But often that reevaluation results in a surprise for many purchasers — realizing they will have significantly less deferred revenue than what they acquired.

The concept of “writing down” deferred revenue as of the acquisition date can be difficult to grasp but in practice can have a substantial impact. If you are, or plan to be, purchasing a business and your target has deferred revenue, understanding what happens to it once you become the owner will be an important aspect of the deal.

Why Deferred Value Changes in a Deal

What does happen to deferred revenue during a transaction? Under purchase price accounting rules, assets and liabilities acquired as part of a business must be revalued at their fair value as of the acquisition date. For most assets and liabilities, this is a straightforward process. When deferred revenue is one of those liabilities, it is often initially assumed the value will not change since the services/products will be provided after the acquisition date.

While it’s correct to say the services/products are yet to be provided — such as a subscription sale that was paid for in advance (sold at an annual price) or the construction of a machine that is paid for in installments per the contract — accounting rules do not allow you to recognize revenue for services/products you did not provide. Essentially, you can’t “take credit” (and the revenue) for efforts related to sales, engineering, marketing or technology, for example, the seller made before you bought the business. So, during the revaluation process you need to think about and document what it will cost you, the purchaser, to provide those yet-to-be-provided services/products.

Let’s look at an example. Say you acquired $100 of deferred revenue related to an annual software subscription that was paid for in advance. Most of the costs to sell the subscription were incurred prior to or at the time of the sale, such as the selling effort, any marketing costs, software platform, etc. So, for you to fulfill the remaining term of the contract you might have some customer service costs and minor maintenance costs for the platform, but that’s about it. As a result, once you tally those costs and add a reasonable mark-up, your actual cost to provide the service is roughly 25% of the balance. This results in a mark-down of $75 to the original $100; in other words, the deferred revenue balance at fair value as of the acquisition date is $25. In almost all situations, the final “write-down” value will result in a significant decrease to the deferred revenue balance you expected to gain in the acquisition.

Determining the Write-Down Value of Deferred Revenue

Depending on the balance of the deferred revenue as of the acquisition date, this write down to fair value could be substantial and difficult to perform. Recognizing this calculation needs to be performed is the first step. Valuation specialists will be able to help you arrive at the fair value, and your accounting team can assist with arriving at a process to determine the value for future acquisitions. Just remember it is always better to ask the questions upfront than be surprised by the answer at the end.

Contact Beth Reho at breho@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.

About the Author

Beth Reho, CPA

Partner, Assurance
breho@cohencpa.com
234.466.1408

Sign Up for Our Emails & Events

Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.

Subscribe Today
Subscribe to our newsletter
About Contact Submit RFP Privacy Policy
LinkedIn Twitter Facebook
© 2023 Cohen & Company