Accounting for liabilities to perform services

A business enterprise has a liability to perform services when it receives an advance payment from a customer. The liability should be measured at an amount that represents the probable future sacrifices that will be incurred by the enterprise in satisfying the liability. In accounting for advance payments for services, measurement of the liability to perform services is a matter of considerable importance. Too often, however, reliable measurement of the liability is ignored in setting accounting policies involving advance payments for services. Deferral of revenue from advance payments for services is usually advocated because revenue recognition is associated with the performance of services. A consequence of revenue deferral is that the inflow of resources is separated from the recognition of revenues. The inflow of resources is a significant event that affects the financial position of the firm and may have increased the net assets of the firm.