KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Deferred (Unearned) Revenue
August 2, 2025
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Deferred (Unearned) Revenue
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Ken,
From time to time the question of Deferred, or Unearned Revenue comes up. Most of the time when an owner is selling, and sometimes when they are trying to understand their monitoring revenue.
My first statement may seem simplistic, but I am amazed at how many times I talk to a company owner, or their accountant, and they don’t get it RMR stands for Recurring Monthly Revenue. This is the amount that is billed to customers each month for one month of service. Sounds simple, but I recently had a company tell me that he had $45,000 of RMR. When I took a look at his customer base, he had $15,000 of RMR that he billed quarterly.
RMR is earned as the service, monitoring, connected services, hosted access control, etc…, is performed. If the company bills their customers for a month at a time they earn the billed amount during that month. If they bill quarterly, the earn it over a three-month period. Let’s consider a typical $30 monitoring account that is billed quarterly ($90). One month, $30, is earned in the month billing month. The balance, $60 is referred to as deferred, or unearned, revenue. $30 of revenue is earned in the next month and in the month subsequent. The process repeats itself when the next invoice is sent.
Deferred Revenue usually becomes an issue during a sale. The Seller may have 1,000 accounts that were billed quarterly and the transaction is set to close at the end of the month. In this case, the total billing is $90,000 and the Seller will have earned $30,000 of it at the closing date. This leaves $60,000 that has been billed by the Seller but will be earned by the Buyer. The Seller has received, or will receive, the entire $90,000. The Purchase Agreement will typically specify that the Buyer will hold the $60,000 out of the purchase price to compensate. This will be shown as Deferred or Unearned, Revenue. It isn’t a reduction of the Purchase Price, it is a reduction of the amount paid. The Seller is getting that portion of the Purchase Price from the customers instead of the Buyer. The Buyer effectively retains the $60,000 as revenue.
Even if you aren’t selling your company accounting for Deferred Revenue makes sense. Let’s go back to the guy with the $45,000 quarterly billing. He has Monitoring Revenue of $45,000 in January, April, July, and October and none in the other nine months. An accountant that understands the industry could show his bookkeeper how to spread the $15,000 over all twelve months.
Most of the alarm specific billing platforms do this automatically. Understanding Deferred Revenue is a step to understanding your revenues and expense.
Mitch Reitman
817 698 9999 XT 101
mreitman@reitman.us
Reitman Consulting Group
Fort Worth, TX
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Response
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More tax and accounting advice. Thank you Mitch.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com
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