How Customer Deposit Liabilities Are Classified and Measured in Financial Statements under IFRS and US GAAP

Customer deposits represent amounts received in advance for goods or services to be delivered in future periods, refundable security deposits, or prepayments that may be forfeited under certain conditions. These balances often sit between deferred revenue and financial liabilities, depending on their contractual nature.

Under IFRS (IAS 1, IFRS 15, IFRS 9) and US GAAP (ASC 606, ASC 405, ASC 440), classification and measurement hinge on whether the deposit represents a performance obligation or a financial liability. Proper presentation affects liquidity, leverage, and revenue timing, especially in sectors like real estate, travel, energy, and utilities, where significant deposits are received long before performance occurs.

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How customer deposits arise

Common types of customer deposits include:

• Advance payments for future delivery of goods or services (retail, manufacturing).

• Security deposits to ensure performance or cover potential damages (leasing, utilities).

• Membership or subscription deposits with refundable or non-refundable elements.

• Construction or property reservation deposits held until contractual milestones.

Example:A construction company receives 500,000 as a down payment for a building project scheduled for completion next year. The deposit is non-interest-bearing and non-refundable after contract signing.

→ Initially recognized as a contract liability under IFRS 15 or ASC 606 until revenue is earned.

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IFRS classification and measurement

IFRS 15 (Revenue from Contracts with Customers) governs deposits received for performance obligations:

• When cash is received before performance, recognize a contract liability.

• When the performance obligation is satisfied, derecognize the contract liability and record revenue.

If the deposit is refundable, it remains a financial liability under IFRS 9, since the entity may need to repay cash.

Key distinction:

• Non-refundable advance: Contract liability (deferred revenue).

• Refundable deposit: Financial liability.

Example — refundable utility deposit:Customer pays a 10,000 refundable connection deposit.

Entry:

• Debit: Cash 10,000

• Credit: Refundable Customer Deposit (Financial Liability) 10,000

If the deposit later becomes non-refundable:

• Debit: Refundable Customer Deposit 10,000

• Credit: Contract Liability (Deferred Revenue) 10,000

Example — non-refundable advance payment:Customer prepays 50,000 for a future service.

• Debit: Cash 50,000

• Credit: Contract Liability 50,000

Upon performance:

• Debit: Contract Liability 50,000

• Credit: Revenue 50,000

Balance sheet classification:

• Typically current liability, unless performance or repayment is expected after more than one year.

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US GAAP classification and measurement

Under ASC 606, customer deposits received in advance of performance are also contract liabilities. The concept mirrors IFRS 15’s treatment of deferred revenue.

Refundable deposits are classified under ASC 405 (Liabilities) and remain a liability until refunded or forfeited.

Examples:

1. Non-refundable prepayment for a product:

   • Dr Cash 40,000

   • Cr Contract Liability 40,000

   • Upon delivery: Dr Contract Liability / Cr Revenue 40,000

2. Refundable membership deposit:

   • Dr Cash 100,000

   • Cr Refundable Customer Deposit 100,000

   • Upon refund: Dr Refundable Deposit / Cr Cash 100,000

Interest component:If deposits are long-term and significant, both IFRS and US GAAP require the time value of money to be recognized if the financing component is material.

Example:A customer deposit held for 3 years without interest, when the normal credit period is 6 months, implies financing. The entity must recognize a financing cost under IFRS 15.60–65 and ASC 606-10-32-15.

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Comparative framework — IFRS vs US GAAP

Topic	IFRS (IAS 1 / IFRS 15 / IFRS 9)	US GAAP (ASC 606 / ASC 405)
Definition	Cash received before performance or refundable collateral	Same principle
Primary standard	IFRS 15 for contract liabilities; IFRS 9 for refundable deposits	ASC 606 for contract liabilities; ASC 405 for refundable deposits
Refundable deposits	Financial liability	Liability under ASC 405
Non-refundable advances	Contract liability, derecognized on performance	Contract liability, derecognized on performance
Interest / financing component	Recognize if significant financing element exists	Recognize if material financing element exists
Presentation	Separate line item or within “Trade and Other Payables”	Separate “Contract Liabilities” or “Deferred Revenue” line
Disclosure	Nature, timing of performance obligations, refund terms	Nature, balance roll-forward, and recognition pattern

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Disclosure examples

IFRS (IFRS 15.116–118) disclosure example:

At 31 December 2025, customer deposits totaling €2.8 million were recognized as contract liabilities. These relate primarily to prepayments for software implementations expected to be completed within the next twelve months. The entity also holds €0.6 million of refundable security deposits presented in financial liabilities.

US GAAP (ASC 606-10-50) disclosure example:

Contract Liability	Amount (USD)	Timing of Recognition
Advance payments for services	1,900,000	Within 12 months
Refundable deposits	400,000	Refundable on cancellation
Total customer-related liabilities	2,300,000

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Journal entries summary

1) Receipt of non-refundable advance (both IFRS and GAAP):

• Dr Cash xx

• Cr Contract Liability xx

2) Performance of obligation:

• Dr Contract Liability xx

• Cr Revenue xx

3) Receipt of refundable deposit:

• Dr Cash xx

• Cr Refundable Deposit Liability xx

4) Refund of deposit:

• Dr Refundable Deposit Liability xx

• Cr Cash xx

5) Conversion of refundable to non-refundable:

• Dr Refundable Deposit xx

• Cr Contract Liability xx

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Impact on financial performance and ratios

• Current ratio: Large contract liabilities or deposits reduce working capital temporarily.

• Leverage: No change, but classification errors can distort liquidity analysis.

• Revenue timing: Deposits accelerate cash receipts but defer revenue recognition.

• Operating cash flow: Boosted on receipt; not affected on recognition of revenue.

• Interest expense: If a significant financing component is present, future revenue is reduced by imputed interest.

Proper classification ensures that analysts distinguish between deferred revenue (future performance) and financing obligations (repayment exposure).

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Operational considerations

• Review all customer contracts for refund clauses, termination rights, and time lags.

• Track deposits separately from standard payables and revenue ledgers.

• Evaluate whether deposits are performance-related or financial in nature.

• Regularly reconcile contract liabilities with revenue recognition schedules.

• Disclose the timing of expected performance linked to deposits for transparency.

Accurate classification of customer deposit liabilities under IFRS and US GAAP avoids misstatements of liquidity, revenue timing, and financial leverage — ensuring that prepayments are reported as obligations, not premature income.

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