Contract incentives/inducements received from a vendor are to be deferred and amortized over the related term of the contract (or specified conditions) whereas a reimbursement of costs may be offset in a manner in which the costs where incurred. Acctg guidance indicates to obtain this treatment, the costs must be specific, incremental and identifiable. Can anyone elaborate on what that means. There is an obvious timing difference in the income stmt recognition (contract is 10 year, costs to be incurred / reimbursed are over 2 year). Yet, I'm struggling in making the distinction. Thanks!
How to differentiate between contract reimbursment and an inducement from a vendor?
Answers
It can be a gray area but in general, the terms "incentives/inducements" should carry more weight in your evaluation.
If the nature of the provision or amount is for you to sign or enter the contract, then it can be deferred or amortized. Tacked on incentives on top of their usual terms. These are usually evident in the negotiation part of the contract/s so you might want to get the input of the person who negotiated the contract.
The "reimbursement" is more part of the contract and as the guidance states, it is a reimbursement for something specific, incremental and identifiable expenses that you may incur during the life of the contract.
The gray area comes when the reimbursement IS the inducement/incentive. But no matter how you decide, CONSISTENCY of treatment with other contracts should be followed.
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Thanks Emerson. Appreciate your points. Yes, the reimbursement is in fact the incentive, which is the difficulty in assessing. But in essense, the reimbursement is ultimately an inducement. Another challenge is explaining that to our operational business partners (non-accountants) who desire immediate recognition.
The other comments make sense to me. If there are specific, identifiable and incremental expenses related to this particular contract that have been agreed to be reimbursable then it sounds like there is a strong case for recognizing recovery as costs are incurred. Letting expenses be recovered in addition to an agreed contract amount may be an inducement but it doesn't stop the expenses being recoverable as incurred. Suggest you write a memo documenting the appropriate facts and your proposed treatment and then run it by your auditors for a blessing.
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