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Technology Stocks : RATIONAL SOFTWARE- BUY OR HOLD
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To: Randy Ellingson who wrote (2692)10/19/1998 1:27:00 PM
From: Len White  Read Replies (2) of 3115
 
Is it true then that deferred revenue, once accounted for, is essentially profit at the gross margin? Or are expense associated with the revenue accounted for only when the deferred revenue processed?

Operating expenses are recognized as they are incurred, whether they are paid or not. The goal of accrual accounting is to match revenue with expenses in the period they are incurred. It could be argued that a salesman's salary should be recognized only when the accounts he works on places orders. But obviously this would be disastrous. Imagine the games CFOs could play. The stronger argument is that the salesman's salary has to be paid regardless of whether he closes any orders, so it is recognized in the period incurred. This is sort of a compromise based on the fact that we just don't know with enough certainty when his labors will pay off. Now, if he receives commissions as well, those will be recognized in the same period as the sales.

Also, from the sound of things here, the company seems to have little say in 'managing revenue' through deferrals. In what situations can they choose between deferring and taking revenue?

As objective as accounting is supposed to be, there is always considerable latitude afforded the company in deciding how most of its activity is accounted for. Thomas's reference to CA is a good example. With software and service companies, you should almost always see a Deferred Revenue line item on a balance sheet, but it is surprising how often it isn't there. When it's there, its an indicator that the company is not desperate to make things look better than they are.
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