The following table identifies the changes made to this Subtopic.
The Other Assets and Deferred Costs Topic includes the following Subtopics:
- a
Overall
- b
- c
Insurance Contracts That Do Not Transfer Insurance Risk.
- d
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.
The following provides background regarding certain items included in this Subtopic.
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.
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.
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.
The guidance in the Other Assets and Deferred Costs Topic applies to all entities.
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.
See Examples 1 through 4 (paragraphs
) for preproduction costs related to long-term supply arrangements.
See paragraphs
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.
See paragraph
210-10-45-2 for a discussion of how the nature of prepaid expenses results in their classification as current assets.
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.
This Example illustrates the recognition guidance in paragraphs
.
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. This Example illustrates the recognition guidance in paragraphs
.
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. This Example illustrates the recognition guidance in paragraphs
.
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. This Example illustrates the recognition guidance in paragraphs
.
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. For accounting for nonrefundable fees and costs associated with lending, committing to lend, or purchasing a group of loans, see Subtopic
310-20.
For capitalization of internal and external costs incurred to develop internal-use computer software, see Sections
350-40-25 and
350-40-30.
For capitalization of costs incurred to treat asbestos, see Section
410-30-45 and paragraphs
.
For accounting criteria for environmental contamination treatment costs, see paragraphs
.
For accounting for the cost of business process reengineering activities, see Subtopic
720-45.
For capitalization and subsequent measurement of initial subscriber installation costs, see Section
922-360-35.
For reporting of an advance royalty to an artist as an asset, see paragraph
928-340-25-1.
For consideration of a membership as an asset by broker dealers, see Section
940-340-25.
For accounting guidance for underwriting expenses by broker dealers, see Sections
940-20-25 and
940-20-35.
For accounting guidance for distribution fees by broker dealers, see Subtopic
940-340.
For accounting for offering costs by investment companies, see Subtopic
946-20.
For capitalization guidance for costs incurred to construct a title plant, see paragraph
950-350-30-1.
For accounting for the costs of computer software to be sold, leased, or otherwise marketed, see Subtopic
985-20.
The following table identifies the changes made to this Subtopic.
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.
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.
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.