Company A bids on a contract to provide services to target company. The target company will provide the facility in which the services will be provided. As a condition of awarding the contract, target company is requiring that Company A contribute towards the renovation of the facility up front. In return, the target company will increase the rate that it will pay by some fixed amount stipulated in the contract.
What is the accounting treatment in the U.S. for the money paid to the target company?
Here is what I think:
DR: Deposit
CR: Cash
(to recognize deposit towards facility improvement)
At the end of period 1 when payment is received for services rendered:
DR: Cash
CR: Revenue (base rate, not including additional amount in exchange for the deposit)
CR: Deposit (equal amounts over the life of the contract
Over the life of the contract, the initial deposit would be amortized fully and the revenue recognized would only be for the original base rate. Does this sound right?
I can’t seem to find guidance on a situation like this, so please in answering the question please cite the ASC, GAAP, or FASB.
I would be inclined to treat the contract as an intangible asset and amortize it directly (DR to Amortization Expense, CR to Accum Amortization).
The deposit itself would go away once the building was constructed/improved, so there’s be no annual credits to the deposit. (DR to Building Assets, CR to Deposit). You’d have annual depreciation on the improvements. (DR to Depreciation Expense and CR to Accum Depreciation).
But I should qualify that by saying my experience is tax-centric and none of my clients worry about GAAP.
As for references… this sounds suspiciously like a homework question and I really don’t have time to do more than offer my impressions anyway.
It depends.. Can you describe the types of services being provided and if this is a fixed rate agreement or time & materials or cost-plus? The way you currently recognize revenue for this contract (assuming you are doing it correctly) will dictate how you will account for this. I might also caution you on this contract in general. Whenever companies require you to do some upfront financing of a project it usually is a bad sign concerning their cash position.
Services are fixed rate and are for health care. Revenue is recognized on units of service provided. The target company is a local municipality, so cash flow is not an issue.
The problem with treating it as an intangible is that there is no actual intangible. I know that sounds like, “duh”, but really there is nothing of value being acquired that is even intangible, save for the contract itself.
My thoughts on the deposit treatment hinge on if the contract is canceled prior to its expiration, we are due back the pro rata portion of the amount we paid up front, hence the amortization of the deposit over time.
