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
Revenue recognised or prepaid for future services?
Answers
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.
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.
1
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
Pre-payments and refundable revenue.
Filed Under:
Accounting