A decrease in unearned rev?

CFA Level II
#1

Does this represent low earnings quality? In the CFA mock it inferred that but I don’t understand why.

Any help?

thanks

#2

Unearned revenue is a nice source of cash. If it’s growing, it means money is coming in before a good/service is being provided. For decreases, there would be an issue if management is prematurely moving money out of unearned revenue to regular revenue in violation of revenue recognition principles.

#3

Thanks! So increases and decreases in unearned rev are both suspect then?

#4

I would say that an increase in UR is not a cause for suspicion. It increases cash and is far more conservative than trying to immediately recognize revenue.

For a decrease in UR, one has to be more careful. Of course, UR would be moved into regular revenue as the organization provides the contracted service/good. Where the shenanigans comes into play is if these amounts are moved to regular revenue, but where the conditions for full revenue recognition have been not been met.