Answers / Financial Due Diligence
What is the correct treatment of deferred revenue in net working capital for a completion accounts mechanism?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Deferred revenue is included in net working capital as a current liability. However, in a QoE context, the change in deferred revenue may be added back to EBITDA if it's non-cash. For the NWC peg, deferred revenue is part of the operating cycle. If the target recognizes revenue upfront but delivers over time, deferred revenue can be volatile; the peg should reflect a normalized level. It is not debt-like because it arises from operations.
WHAT INTERVIEWERS LISTEN FOR
- ✓deferred revenue in NWC as liability
- ✓not debt-like
- ✓normalize for volatility in peg
- ✓QoE adjustment for non-cash change
COMMON MISTAKES
- ✗Classifying deferred revenue as debt-like
- ✗Excluding it from NWC
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