ASC

ASC 340-10

Overall

340 Other Assets and Deferred Costs

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In brief

IntermediateRecognitionInventory and PP&ESubsequent measurementFinancial statement presentation

ASC 340-10 is the Overall subtopic for Other Assets and Deferred Costs, applicable to all entities. Its substantive guidance is limited to (1) describing prepaid expenses — amounts paid in advance (insurance, interest, rents, taxes, unused royalties, prepaid advertising service, operating supplies) that are used up within the normal operating cycle and classified as current assets — and (2) the recognition rules for preproduction design and development costs incurred under long-term supply arrangements. Costs deferred under other regimes (loan origination costs, internal-use software, environmental costs, broker-dealer and industry costs) are addressed by other Topics cross-referenced in Section 60.

Key points (7)
  • Design and development costs for the products themselves to be sold under a long-term supply arrangement shall be expensed as incurred (340-10-25-1).
  • Design and development costs for molds, dies, and other tools the supplier will own are capitalized as part of those tools, subject to impairment testing under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10, unless the tools involve new technology, in which case the costs are expensed under Subtopic 730-10 (340-10-25-1).
  • Design and development costs for molds, dies, and tools the supplier will not own are capitalized only if the supply arrangement gives the supplier a noncancelable right to use them during the arrangement (while performing); otherwise they are expensed as incurred, including costs incurred before that right is obtained (340-10-25-2).
  • Costs that would otherwise be expensed are recognized as an asset as incurred if a contractual guarantee for reimbursement exists — a legally enforceable agreement in which the reimbursement amount can be objectively measured and verified (340-10-25-3); Examples 1-4 at 340-10-55-2 through 55-5 illustrate that per-part pricing arrangements without a measurable reimbursement do not qualify.
  • Prepaid expenses are paid in advance of use, are typically consumed within the normal operating cycle, and are classified as current assets (340-10-05-4 through 05-5; see 210-10-45-2).
  • The accrue-in-advance (accrual) method of accounting for planned major maintenance activities is prohibited in annual and interim periods (340-10-25-5, referencing 360-10-25-5).
  • The Topic applies to all entities (340-10-15-2), and long-term prepaid assets are evaluated under the long-lived asset guidance at 360-10-15-4 through 15-5 (340-10-35-1).

For students. The exam trap is assuming all preproduction costs under a supply contract can be deferred: product design and development costs are expensed unless there is a contractual guarantee whose reimbursement amount is objectively measurable and verifiable, and tooling costs are capitalizable only if the supplier owns the tools (non-new-technology) or holds a noncancelable right to use them. Note also that 340-10 is mostly a signpost — specific deferred costs live in other Topics (310-20, 350-40, 340-40, 985-20).

prepaid expensespreproduction costslong-term supply arrangementdesign and development costsmolds, dies, and other toolscontractual guarantee of reimbursementnoncancelable right to useplanned major maintenance

Machine-generated study aid for ASC 340-10. Check the source paragraphs below.

340-10-00Status

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340-10-05Overview and Background

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340-10-05-1
The Other Assets and Deferred Costs Topic includes the following Subtopics:
  1. a
    Overall
  2. b
    Subparagraph superseded by Accounting Standards Update No. 2014-09.
  3. c
    Insurance Contracts That Do Not Transfer Insurance Risk.
  4. d
    Contracts with Customers
340-10-05-2
The Overall Subtopic addresses the accounting and reporting for certain deferred costs and prepaid expenses. The guidance in this Subtopic is limited to a discussion of the nature of prepaid expenses and preproduction costs related to long-term supply arrangements. The specific guidance for many other costs that have been deferred is included in various other financial, broad, and industry Topics. References to certain, but not all, of the guidance in other Topics are included in this Subtopic.

Deferred Costs Addressed in this Subtopic

340-10-05-3
The following provides background regarding certain items included in this Subtopic.
340-10-05-4
Prepaid expenses are a category of assets that are typically used up or expire within the normal operating cycle of an entity. The term derives from the fact that they are paid in advance of their use or consumption.
340-10-05-5
Prepaid expenses include items such as the following:
  1. a
    Insurance
  2. b
    Interest
  3. c
    Rents
  4. d
    Taxes
  5. e
    Unused royalties
  6. f
    Current paid advertising service not yet received
  7. g
    Operating supplies.
340-10-05-6
Manufacturers often incur preproduction costs related to products they will supply to their customers under long-term supply arrangements. For example, the manufacturer may incur costs to perform certain services related to the design and development of the products it will sell under long-term supply arrangements and may incur costs to design and develop molds, dies, and other tools that will be used in producing those products. While practice varies from industry to industry, the supplier may be contractually guaranteed reimbursement of design and development costs, implicitly guaranteed reimbursement of design and development costs through the pricing of the product or other means, or not guaranteed reimbursement of the design and development costs incurred under the long-term supply arrangement.

340-10-15Scope and Scope Exceptions

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Overall Guidance

340-10-15-1
The Scope Section of the Overall Subtopic establishes the pervasive scope for all Subtopics of the Other Assets and Deferred Costs Topic. Unless explicitly addressed within specific Subtopics, the following scope guidance applies to all Subtopics of the Deferred Costs and Other Assets Topic.

Entities

340-10-15-2
The guidance in the Other Assets and Deferred Costs Topic applies to all entities.

340-10-25Recognition

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Preproduction Costs Related to Long-Term Supply Arrangements

340-10-25-1
Design and development costs for products to be sold under long-term supply arrangements shall be expensed as incurred. Design and development costs for molds, dies, and other tools that a supplier will own and that will be used in producing the products under a long-term supply arrangement shall be capitalized as part of the molds, dies, and other tools (subject to an impairment assessment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10) unless the design and development is for molds, dies, and other tools involving new technology, in which case, the costs shall be expensed as incurred in accordance with Subtopic 730-10.
340-10-25-2
Design and development costs for molds, dies, and other tools that a supplier will not own and that will be used in producing the products under the long-term supply arrangement shall be capitalized (subject to an impairment assessment under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10) if the supply arrangement provides the supplier the noncancelable right (as long as the supplier is performing under the terms of the supply arrangement) to use the molds, dies, and other tools during the supply arrangement. Otherwise, those design and development costs shall be expensed as incurred, including costs incurred prior to the supplier's receiving the noncancelable right to use the molds, dies, and other tools during the supply arrangement.
340-10-25-3
If a contractual guarantee for reimbursement exists for design and development costs that otherwise would be expensed based on the guidance in this Section, those costs shall be recognized as an asset as incurred. For purposes of this Subtopic, contractual guarantee means a legally enforceable agreement in which the amount of reimbursement can be objectively measured and verified.
340-10-25-4
See Examples 1 through 4 (paragraphs
340-10-55-2 through 55-5
) for preproduction costs related to long-term supply arrangements.

Planned Major Maintenance Activities

340-10-25-5
Paragraph 360-10-25-5 states that the use of the accrue-in-advance (accrual) method of accounting for planned major maintenance activities is prohibited in annual and interim financial reporting periods.

340-10-35Subsequent Measurement

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340-10-35-1
See paragraphs
360-10-15-4 through 15-5
for a discussion of the applicability of the guidance on long-lived assets to be held and used or disposed of to long-term prepaid assets.

340-10-45Other Presentation Matters

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Classification of Prepaid Expenses

340-10-45-1
See paragraph 210-10-45-2 for a discussion of how the nature of prepaid expenses results in their classification as current assets.

Planned Major Maintenance Activities

340-10-45-2
See paragraphs 360-10-45-1 and 908-360-45-2 for a discussion of the consistent application of the method of accounting for planned major maintenance activities.

340-10-55Implementation Guidance and Illustrations

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Illustrations

340-10-55-2
This Example illustrates the recognition guidance in paragraphs
340-10-25-1 through 25-3
. It is assumed that the design and development costs would be expensed under that guidance absent a reimbursement arrangement. It is also assumed that the supply arrangement is legally enforceable. An entity enters into a long-term arrangement with a supplier in which the entity agrees to reimburse the supplier for preproduction design and development costs incurred under the arrangement, up to a maximum reimbursement of $1,000,000. Under this arrangement, the amount of reimbursement for design and development costs can be objectively measured and verified. The supplier shall recognize the design and development costs as an asset as costs are incurred, up to a maximum of $1,000,000.
340-10-55-3
This Example illustrates the recognition guidance in paragraphs
340-10-25-1 through 25-3
. It is assumed that the design and development costs would be expensed under that guidance absent a reimbursement arrangement. It is also assumed that the supply arrangement is legally enforceable. An entity enters into a long-term arrangement with a supplier in which the entity agrees to pay the supplier $55 per part for the first 200,000 parts produced and $50 for every part thereafter. No agreement exists concerning reimbursement of the supplier's design and development costs if fewer than 200,000 parts are produced under the arrangement. Under this arrangement, the amount of reimbursement for design and development costs cannot be objectively measured and verified. The supplier shall expense the preproduction design and development costs as incurred.
340-10-55-4
This Example illustrates the recognition guidance in paragraphs
340-10-25-1 through 25-3
. It is assumed that the design and development costs would be expensed under that guidance absent a reimbursement arrangement. It is also assumed that the supply arrangement is legally enforceable. An entity enters into a long-term arrangement with a supplier in which the entity agrees to pay the supplier $55 per part for the first 200,000 parts produced and $50 for every part thereafter. The arrangement provides that if fewer than 200,000 parts are produced, the supplier will be reimbursed for design and development costs incurred under the arrangement, up to a maximum reimbursement of $1,000,000 reduced by $5 per part for each part produced under the supply arrangement. For example, if 190,000 parts are produced under the supply arrangement, in addition to the $55 per part received for the parts produced, the supplier would be reimbursed for design and development costs incurred under the arrangement, up to a maximum of $50,000 [$1,000,000 - ($5 X 190,000)]. Under this agreement, the amount of reimbursement for design and development costs can be objectively measured and verified. The supplier shall recognize the design and development costs as an asset as costs are incurred, up to a maximum of $1,000,000.
340-10-55-5
This Example illustrates the recognition guidance in paragraphs
340-10-25-1 through 25-3
. It is assumed that the design and development costs would be expensed under that guidance absent a reimbursement arrangement. It is also assumed that the supply arrangement is legally enforceable. An entity enters into a long-term arrangement with a supplier in which the entity agrees to pay the supplier $52.50 per part. The arrangement requires that a minimum of 400,000 parts be produced. If fewer than 400,000 parts are produced under the arrangement, the supplier will receive a payment of $52.50 per part not produced under the arrangement, up to a maximum of 400,000 parts. Under this arrangement, the amount of reimbursement for design and development costs cannot be objectively measured and verified. The supplier shall expense the design and development costs as incurred.

340-10-60Relationships

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Receivables

340-10-60-1
For accounting for nonrefundable fees and costs associated with lending, committing to lend, or purchasing a group of loans, see Subtopic 310-20.

Intangibles—Goodwill and Other

340-10-60-2
For capitalization of internal and external costs incurred to develop internal-use computer software, see Sections 350-40-25 and 350-40-30.

Asset Retirement and Environmental Obligations

340-10-60-3
For capitalization of costs incurred to treat asbestos, see Section 410-30-45 and paragraphs
410-30-25-17 through 25-18
.
340-10-60-4
For accounting criteria for environmental contamination treatment costs, see paragraphs
410-30-25-16 through 25-19
.

Other Expenses

340-10-60-7
For accounting for the cost of business process reengineering activities, see Subtopic 720-45.

Entertainment—Cable Television

340-10-60-10
For capitalization and subsequent measurement of initial subscriber installation costs, see Section 922-360-35.

Entertainment—Music

340-10-60-11
For reporting of an advance royalty to an artist as an asset, see paragraph 928-340-25-1.

Financial Services—Brokers and Dealers

340-10-60-12
For consideration of a membership as an asset by broker dealers, see Section 940-340-25.
340-10-60-13
For accounting guidance for underwriting expenses by broker dealers, see Sections 940-20-25 and 940-20-35.
340-10-60-14
For accounting guidance for distribution fees by broker dealers, see Subtopic 940-340.

Financial Services—Investment Companies

340-10-60-15
For accounting for offering costs by investment companies, see Subtopic 946-20.

Financial Services—Title Plant

340-10-60-16
For capitalization guidance for costs incurred to construct a title plant, see paragraph 950-350-30-1.

Software

340-10-60-17
For accounting for the costs of computer software to be sold, leased, or otherwise marketed, see Subtopic 985-20.

340-10-S00StatusSEC

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340-10-S00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
340-10-S99-2AmendedAccounting Standards Update No. 2012-0308/27/2012
340-10-S99-2AmendedAccounting Standards Update No. 2010-2208/19/2010

340-10-S25RecognitionSEC

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Expenses Incurred Before the Effective Date of an Offering of Equity Securities

340-10-S25-1
See paragraph 340-10-S99-1, SAB Topic 5.A, for SEC Staff views on deferral of costs related to an equity offering incurred before the effective date of the offering.

340-10-S30Initial MeasurementSEC

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Debt Issue Costs in Conjunction with a Business Combination

340-10-S30-1
See paragraph 340-10-S99-2, SAB Topic 2.A.6, Question 1, for SEC Staff views on accounting for debt issues costs paid to an investment banker in connection with a business combination.

340-10-S35Subsequent MeasurementSEC

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Debt Issue Costs in Conjunction with a Business Combination

340-10-S35-1
See paragraph 340-10-S99-2, SAB Topic 2.A.6, Question 1, for SEC Staff views on the amortization of debt issue costs for interim "bridge financing."

340-10-S45Other Presentation MattersSEC

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Balance Sheet Presentation of Deferred Charges

340-10-S45-1
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.17, for required balance sheet presentation for deferred charges and other assets.

340-10-S50DisclosureSEC

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Pre-Production Costs Related to Long-Term Supply Agreements

340-10-S50-1
See paragraph 340-10-S99-3, SEC Observer Comment: Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements, for SEC Staff views on disclosure of accounting policy and other matters pertaining to pre-production design and development costs.
340-10-S50-2
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.17, for the requirement to disclose policy for deferral and amortization of deferred costs.

340-10-S99SEC MaterialsSEC

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SEC Staff Guidance

340-10-S99-1
The following is the text of SAB Topic 5.A, Expenses of Offering.
  • Facts: Prior to the effective date of an offering of equity securities, Company Y incurs certain expenses related to the offering.
  • Question: Should such costs be deferred?
  • Interpretive Response: Specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. However, management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering.
340-10-S99-2
The following is the text of SAB Topic 2.A.6, Debt Issue Costs in Conjunction with a Business Combination.
  • Facts: Company A is to acquire the net assets of Company B in a transaction to be accounted for as a business combination. In connection with the transaction, Company A has retained an investment banker to provide advisory services in structuring the acquisition and to provide the necessary financing. It is expected that the acquisition will be financed on an interim basis using "bridge financing" provided by the investment banker. Permanent financing will be arranged at a later date through a debt offering, which will be underwritten by the investment banker. Fees will be paid to the investment banker for the advisory services, the bridge financing and the underwriting of the permanent financing. These services may be billed separately or as a single amount.
  • Question 1: Should total fees paid to the investment banker for acquisition-related services and the issuance of debt securities be allocated between the services received?
  • Interpretive Response: Yes. Fees paid to an investment banker in connection with a business combination or asset acquisition, when the investment banker is also providing interim financing or underwriting services, must be allocated between acquisition related services and debt issue costs.
  • When an investment banker provides services in connection with a business combination or asset acquisition and also provides underwriting services associated with the issuance of debt or equity securities, the total fees incurred by an entity should be allocated between the services received on a relative fair value basis. The objective of the allocation is to ascribe the total fees incurred to the actual services provided by the investment banker.
  • FASB ASC Topic 805, Business Combinations, provides guidance for the portion of the costs that represent acquisition-related services. The portion of the costs pertaining to the issuance of debt or equity securities should be accounted for in accordance with other applicable GAAP.
  • Question 2: May the debt issue costs of the interim "bridge financing" be amortized over the anticipated combined life of the bridge and permanent financings?
  • Interpretive Response: No. Debt issue costs should be amortized by the interest method over the life of the debt to which they relate. Debt issue costs related to the bridge financing should be recognized as interest cost during the estimated interim period preceding the placement of the permanent financing with any unamortized amounts charged to expense if the bridge loan is repaid prior to the expiration of the estimated period. Where the bridged financing consists of increasing rate debt, the guidance issued in FASB ASC Topic 470, Debt, should be followed. FN1
    • FN1 As noted in FASB ASC paragraph 470-10-35-2, the term-extending provisions of the debt instrument should be analyzed to determine whether they constitute an embedded derivative requiring separate accounting in accordance with FASB ASC Topic 815, Derivatives and Hedging.
340-10-S99-3
The following is the text of SEC Observer Comment: Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements.
  • Registrants will be expected to disclose their accounting policy for pre-production design and development costs (paragraph 340-10-25-1) as well as the aggregate amount of:
    • a. Assets recognized pursuant to agreements that provide for contractual reimbursement of pre-production design and development costs
    • b. Assets recognized for molds, dies, and other tools that the supplier owns
    • c. Assets recognized for molds, dies, and other tools that the supplier does not own.

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