e.Digital Corporation (fka EDIG)

[Cassandra]

Regarding deferred revenue and deferred expenses:

e.Digital uses accrual accounting (see definition at bottom), not cash accounting. The company has clear guidelines as to when revenue and related costs of revenue are recognized. Therefore, contrary to the supposed claim by RP, it would violate e.Digital's accounting policies to attempt to defer "profit" (something that entities which use cash accounting are able to do).

If the company receives a payment on a contract (like Softeq or APS), but that payment does not qualify for revenue recognition, it is booked as deferred revenue. Likewise, expenses and charges incurred on a contract wherein the revenue does not qualify for recognition, are booked as an asset and not taken as a cost of revenue expense until the revenue is recognized.

If you look at the balance sheet, you will see asset categories for "Deposits and Prepaid Expenses" as well as "Deferred Contract Charges." Most of those are expenses and charges incurred for product development contracts in which the related revenue has not yet been recognized. Therefore, they are deferred and carried as assets until they are recognized along with the revenue.

With products (like the Ody 1000), any amounts paid for manufacturing are booked as inventory (also an asset) until the revenue from the product is booked, at which time the associated costs are booked as cost of revenue.

On products, the e.Digital policy is that revenue received is recognized when the product is shipped (unless it's a consignment arrangement). I would assume the standard on revenue recognition for contracts like Softeq is similar. For NRE fees they most likely have policies as to how much of the scope of work had been completed.

Lastly, IMO EDIG should book contract like Softeq, F-T and APS on a different revenue line from "products" because they account for them in different expense categories prior to being sold (not inventory).

Definition of Accural Basis Accouting:

Accounting method whereby income and expense items are recognized as they are earned or incurred, even though they may not have been received or actually paid in cash. Accrual accounting provides an accurate picture of a company's performance buy cannot assist in monitoring cash flow.

The alternative is CASH BASIS accounting.

http://www.investment.com/glossary/adefs/accrualbasis.html

Feel free to let me know if additional clarification is needed.