[animalwithin]

Random question not related to the CPA exam.

My dad and I are in the process of purchasing a property of which a large fitness franchise will be our tenant (think 24hr Fitness, LA Fitness, etc).

We recently received their financials and a few things are alarming. They have liabilities in excess of assets over $1,000,000,000 as well as a member’s deficit in the same amount.

Our agent said that GAAP accounting allows fitness centers to list future membership revenue as a liability rather than an asset because it allows the company to disguise their net worth.

That doesn’t make sense. First off, I don’t know which revenues they’re deferring since gym memberships are month-to-month. Second, deferred revenue is a liability, so how is the agent alluding to the idea that it should be under assets but that they’re choosing to list it as a liability to disguise their net worth?

[ob1]

Late response but LA fitness does have a descent amount of deferred revenue. For the people that pay month to month they also pay a maintenance fee in December. I think it's around $40/person. Multiply that times every member paying monthly divide by 12 and multiply by 11. That should be deferred revenue balance. There's also a descent amount of people that pay annually like me. Depending on plan from $240 to $400.

Also the deferred revenue is a liability because it won't hit the income statement until it's realized. First they record the Cash (Dr) and the deferred revenue (cr). Then they record the revenue over the service period and the deferred revenue decrease. Deferred revenue (Dr) and Revenue (cr).

[aaronmo]

I don't mean this rudely, but if you and your dad can afford to buy a property with major tenants, you should probably be paying for expertise. As far as the question…

Does your agent know you have an accounting background? He may assume you don't know how deferred revenue is classified. Were the financials you looked at reviewed?

AUD - 96
BEC - 84
FAR - 89
REG - 86

Aaron and always remember, YMMV

I profit from your CPE frustration. You're welcome.

[Biff Tannen]

If I had the money to buy a company with 1 billion in liabilities, I sure as hell would not be getting any accounting advice on this site. I suspect this is a troll posting

AUD - 78
BEC - 84
FAR - 79
REG - 85

“An investment in knowledge pays the best dividends” - Benjamin Franklin

[aaronmo]

He's buying land that the company with liabilities leases. Basically a large part of the real estate transaction involves expected revenues, and if the gym isn't a going concern, the property isn't worth as much.

AUD - 96
BEC - 84
FAR - 89
REG - 86

Aaron and always remember, YMMV

I profit from your CPE frustration. You're welcome.

[Author]

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