In the notes to its 2009 financial statements, SAP Group describes its deferred income as follows:

Deferred income consists mainly of prepayments made by our customers for support services and professional services, fees for multiple element arrangements allocated to undelivered elements, and amounts . . . for obligations to perform under acquired support contracts in connection with acquisitions.

Apple’s deferred revenue arises from sales involving components, some delivered at the time of sale and others to be delivered in the future. In its 2009 financial statements, Apple Inc. explains that accounting for sale of some of its products is treated as two deliverables: . . . The first deliverable is the hardware and software delivered at the time of sale, and the second deliverable is the right included with the purchase of iPhone and Apple TV to receive on a when-and-if-available basis future unspecified software upgrades and features relating to the product’s software . . . the Company is required to estimate a stand-alone selling price for the unspecified software upgrade right included with the sale of iPhone and Apple TV and recognizes that amount ratably over the 24-month estimated life of the related hardware device . . .

1. In general, in the period a transaction occurs, how would a company’s balance sheet reflect $100 of deferred revenue resulting from a sale? (Assume, for simplicity, that the company receives cash for all sales, the company’s income tax payable is 30 percent based on cash receipts, and the company pays cash for all relevant income tax obligations as they arise. Ignore any associated deferred costs.)

2. In general, how does deferred revenue impact a company’s financial statements in the periods following its initial recognition?

3. Interpret the amounts shown by SAP Group as deferred income and by Apple Inc.
as deferred revenue.

4. Both accounts payable and deferred revenue are classified as current liabilities. Discuss the following statements:

A. When assessing a company’s liquidity, the implication of amounts in accounts payable differs from the implication of amounts in deferred revenue.

B. Some investors monitor amounts in deferred revenue as an indicator of future revenue growth.