Prepaid Digital Asset

April 16, 2022

by a searcher from Utah State University in Palmyra, NY 14522, USA

I'm at the tail end of a deal with a digital company similar to a hosting company.

We're negotiating on the value or ownership of the accounts.
There are 57 customers that have prepaid for the year, the rest are monthly accounts.

I brought up the fact that the money already paid should be mine, as the company has not delivered the services yet, and if things go 'south' and they all want refunds, I would be on the hook for all that $$ - basically a liability. They argue that there never are refunds, and if there is a problem, they would be happy to refund them as the need arises.

This is a rather grey area, both sides have points, but I'm unwilling to accept this as taking this revenue would severely affect the cash flow and sustainability, amongst many other reasons.

How do I counter this?

Reply by a professional
from University of California, Berkeley in Sacramento, CA, USA

A middle ground is you the sellers take the "Gross Profit" portion of it. i.e. if the gross profit is 80%, then it only costs you 20% of those prepaid funds to earn the same revenue. So 80% of that portion can go to the seller.

They other way you can go around this conversation is to include Deferred Revenue as a part of Working Capital calculation... and just settle it that way.

Reply by a professional
from New York University in New York, NY, USA

You can do whatever you want for this, but from a tax perspective they probably don't recognize the income until they perform the services, so if they want to keep the money then they need to recognize the income. I suspect they have no idea that this will be the case, but you need to make sure that you're not recognizing the income when they get the cash.

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