USA Capital equipment acquisition proposal- How to report net cost savings from old asset trade-in?


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Greetings! I am seeking opinions or GAAP theories on the proper presentation for a significant maintenance - support plan savings on trade-in of old equipment with purchase of new equipment in the financials of a capital proposal. The proposal team has done analysis on the cost of support plan from new vendor versus continuing with a more expensive vendor, resulting in 7-figure savings if trade-in / replacement occurs. They reported this over 2 lines on the schedule that the Accounting Department approves:
(1) New Equip: Service vendor new - new cost coming in change (+);
(2) Old Equip: Service vendor out - old cost coming out 3 years worth (-).
The net effect is over ($2M) credit in savings from switching and results in net credit total on Accounting schedule. However, the items classified as CapEx agree with amount requested in the software system.

Does GAAP allow for reporting this projection of cost savings, e.g. if project is funded then team will purchase 3 pieces of new equipment that effectively cost significantly less to operate than one of the current vendor's equipment? Technically, the net cost savings may not be considered a projection as the new and old support plan costs are known per purchase agreements. However, should this still be kept distinct and separate from reporting in capital proposal? Is a more appropriate place to list the expected net savings in a section such as On-going Opex or Cost Savings Attrition and keep it out of regular Operating Expense section? Should I advise to report on the Accounting schedule the acquisition and associated costs (shipping, taxes, etc.) and new cost of service plan per agreement only?

On a related note, are there any opinions on whether "testing materials" consisting of paper to print tests runs of functionality of new machine are capitalizable? It seems to me that although paper may be considered as supplies, the activity of using paper to perform testing could represent a cost of getting asset / equipment ready for service and therefore capitalized.

Thank you for any feedback!
 

kirby

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GAAP result will be that you will see the cost of maintenance decrease with each year. There is no one-time report of "income" as the benefit of the change.
The paper used to print the test results is now, of course, used up and has no future benefit. Thus the paper that has been printed on is an expense and not capitalizable. There is no future benefit to be gained from the used up paper.

Wow, how much paper did you use up anyway to make this an issue?? What ever happened to using PDF?:)
 
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Thank you for your response, Kirby. I will pass your advice onto the proposal submitter at it sounds very reasonable.

The total paper cost was $12k, so not an extremely material number, but large enough to wonder about pdf. ;) It sounds like we must consider the end result of paper in test process, e.g. used up with no lasting benefit. I see that I erred in focusing only on the initial association with test process as testing activities are generally considered CapEx.
 

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