The Importance of Unearned Revenue

Unearned revenue—money collected for products or services not yet delivered—is an increasingly important part of Microsoft’s business. Because the company has so much unearned revenue on its books (nearly US$8 billion at the end of its 2002 fiscal year on June 30), partners and investors must understand what it is and how Microsoft records it to get a clear picture of the company’s finances and the health of its product lines. Because unearned revenue helps Microsoft smooth its financial results from quarter to quarter, the company will try to increase it by marketing multiyear license agreements more aggressively.

Why Unearned Revenue Matters

Unearned revenue (sometimes called deferred revenue) is money that a business has already collected for products or services it has not yet delivered. A magazine subscription is a good example: the customer pays the entire subscription fee upfront in exchange for a promise that the publisher will deliver a specified number of issues over a certain time period. Because the publisher must deliver something in the future, it does not immediately count the money received as revenue, and this money does not immediately show up as part of profits or losses. Rather, the publisher books the money as unearned revenue, then slowly transfers it to revenue (or “recognizes” it) over the term of the subscription.