USA Vendor's startup costs - Expense or Capitalize?


Joined
May 21, 2021
Messages
2
Reaction score
0
Country
United States
Hello,

I am the Controller at a private, nonprofit university in NH. We just entered into a multi-year service agreement with a vendor which provides outsourced facilities services. The agreement references $170k in startup costs which the vendor is including in the annual contract price, amortized over the 7 year term of the agreement, to be billed accordingly. If we were to terminate the agreement, the balance of unamortized startup costs are still owed to the vendor in full. I am unsure of how to treat the startup expenses on my end.

Option 1: Amortize the $170k of startup expenses as an asset on the books as of the effective date of the agreement, credit liability-payable to vendor. Recognize the expense and reduce the asset over the life of the agreement.

Option 2: Recognize the full $170k of expenses in year 1 as of the effective date, credit liability-payable to vendor.

Option 3: Is there a better option that I am missing?

Any guidance would be greatly appreciated. Thank you!
 
Ad

Advertisements

kirby

VIP Member
Joined
May 12, 2011
Messages
2,160
Reaction score
291
Country
United States
What do the start-up costs consist of?

(If it is just lunch and drinks then forget about making that an asset):p
 
Joined
May 21, 2021
Messages
2
Reaction score
0
Country
United States
What do the start-up costs consist of?

(If it is just lunch and drinks then forget about making that an asset):p
LOL I wish! There were legal fees (on their end) and significant costs on the vendor's end needed to determine the size & scope of the agreement. If it was $170,000 on food & drink I'd quit my job right now and go work for them! :)
 
Ad

Advertisements

Samir

VIP Member
Joined
Aug 15, 2013
Messages
364
Reaction score
38
Country
United States
Generally, when a company sends me a bill and I ordinarily would be expensing that bill, what that bill consists of is irrelevant to me.

Think of it like a car lease. The leasing company may be capitalizing behind their closed doors, but you are essentially paying just a lease bill which is fully expensed. You can also think of it as a commercial lease where a landlord does a 'build-to-suit' for a tenant and then bills the tenant but the asset and improvements remain with the landlord. From the tenant side, it's just a lease expense.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top