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How do I treat Deferred Maintenance Revenues in TEV?

Full Question: I have a question regarding how to treat Deferred Maintenance Revenues relating to maintenance fees earned by a company for software licenses in terms of calculating the Equity Value of a Company. Normally, the Equity Value = TEV + Cash less Debt. However, should the Deferred Maintan... Read More

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by Guest 1.

added 11 years ago

RE: How do I treat Deferred Maintenance Revenues in TEV?

Thank you for your email. The deferred maintenance liabilities relates to software maintenance contracts. Normally the company receives cash upfront at the start of the 3 year maintenance contract and then has an obligation to perform on such contract over the 3 year period. These obligations are wh... Thank you for your email. The deferred maintenance liabilities relates to software maintenance contracts. Normally the company receives cash upfront at the start of the 3 year maintenance contract and then has an obligation to perform on such contract over the 3 year period. These obligations are what the deferred maintenance liability account balance on the balance sheet are comprised of. Each month, this liability is reduced as the company recognizes a portion of the maintenance contract revenues into income.

Much of the cash received from these contracts may have already been spent by the existing owner and therefore, the new owner of the business would still be liable to perform on these maintenance contracts even though the cash that was originally received for these contracts are no longer available to the new owner to cover the related expenses of performing on these contracts.

In addition, when the original maintenance contract is just about to expire, the company will invoice customers about 30 to 90 days in advance of the termination of the original contract. The company will record the maintenance contract revenue on these renewal maintenance contracts upon invoicing and not when the maintenance contracts are accepted by the customer.

I understand that normally TEV + cash - debt = Equity Value. However in this case, how would you treat the deferred maintenance liability which is shown below the current liabilities but above the stockholder's equity section on the balance sheet considering 1) the fact that some of the cash that has been collected on the maintenance contracts is no longer at the company and 2) that some of the deferred liability represents future obligations that are booked prematurely because the company invoices 30 to 90 days in advance of the termination of the original contract and will record the maintenance contract revenue and liability on these renewal maintenance contracts upon invoicing and not when the maintenance contracts are accepted by the customer.

Thank you in advance for your help!! Read More

by Guest 1.

added 11 years ago

RE: How do I treat Deferred Maintenance Revenues in TEV?

This is definitelty akin to deferred revenue and unearned revenue (ie magazine subscriptions). Thus, not to be part of TEV and so the same answer - don't add or subtract. In the case of a merger, we would normally treat this as a closing adjustment due to working capital - that is, the buyer req... Read More

by WST Expert 1.

added 11 years ago

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