As of August 1st, we will be charging a non-refundable deposit of 10-20% of deal value. Initially, I will book this to customer deposit (liability) until we have delivered on our end. The majority of our customers who sign deals follow through on them (ie more than 90%), however, the purpose of the deposit is to ensure customers are more committed to the process (ie don't change mind once HW delivered and before services are deployed). How do I account for the non-refundable deposits for customers who choose to walk away? Is it proper to book revenue at time of churn? And would I classify it as "other income"? Thank you.
Accounting for Non-Refundable Deposits
Answers
If at time of signing, the contract says non-refundable, then at a minimum I would charge unearned revenue (for that portion that is non-refundable), the other would be customer deposit.
I would then move it to revenue once the deadline of the deal has past or the customer has exercised the cancellation aspect of the contract.
It appears that you have already determined that you are under a completed contract model (i.e., you are not doing contract
That being said, I would caution you to not record revenue just because some period has lapsed. Just because you have received monies that are non-refundable, doesn't mean an earnings process has occurred. The question is whether value has transferred to the customer. Per SEC comments, offsetting set-up fees and recording a portion of the fee received as revenue is not appropriate as the customer probably wouldn't assign any value to that activity (ASC 605 has some good examples - one related to health club membership and non-refundable fees that you might want to look at and/or analogize to).
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