Greetings everyone.
I am currently employed at a communications Company (The Co.) that is private, but trying to go public. The Co. purchases subscriptions from a vendor (USA) for their proprietary software. The Co. then bundles it with services being provided to customers and leases out those subscription. The USA subscription is for 12 months while the lease to customers are for 36 months. The Co. sets up the liability for the subscription for 12 monthly payments. It capitalizes the services bundle for 36 months, in two assets. One for the service rendered and the other for the subscribed software.
After the 12 months, the Co. sets up another 12 month subscription with USA, and capitalizes that for another 36 months. No enhancements or additional costs are incurred during the renewal.
My problem with the above accounting (liability and capitalization) is that the lease capitalization does not match the subscription. The asset is on the books when the company does not have the right to the asset for the additional 24 months. Then, it capitalizes a new 12 month subscription for 36 months, which is basically for the one that just expired.
I believe the company should only capitalize the lease for the software for 1 year, the term of the subscription. Am I correct? If so, besides ASC 840, what other accounting standard can I read to support my case when I approach management?
Thank you in advance for your any guidance you can provide.
Ono
I am currently employed at a communications Company (The Co.) that is private, but trying to go public. The Co. purchases subscriptions from a vendor (USA) for their proprietary software. The Co. then bundles it with services being provided to customers and leases out those subscription. The USA subscription is for 12 months while the lease to customers are for 36 months. The Co. sets up the liability for the subscription for 12 monthly payments. It capitalizes the services bundle for 36 months, in two assets. One for the service rendered and the other for the subscribed software.
After the 12 months, the Co. sets up another 12 month subscription with USA, and capitalizes that for another 36 months. No enhancements or additional costs are incurred during the renewal.
My problem with the above accounting (liability and capitalization) is that the lease capitalization does not match the subscription. The asset is on the books when the company does not have the right to the asset for the additional 24 months. Then, it capitalizes a new 12 month subscription for 36 months, which is basically for the one that just expired.
I believe the company should only capitalize the lease for the software for 1 year, the term of the subscription. Am I correct? If so, besides ASC 840, what other accounting standard can I read to support my case when I approach management?
Thank you in advance for your any guidance you can provide.
Ono