When recording a maintenance agreement that runs over the next year, what dollar threshold (or materiality) do you use to determine whether to record as a period expense or to amortize it over the year?
Prepaid Amortiztion Threshold
Answers
My personal preference is a combo of $$ threshold and type...not just $$ amount alone.
Let me enumerate my factors....
1. Size of company.
2, Your accounting software functionality/ies - the amount of effort to amortize. If your accounting software allows auto amortization at point of input and does not require additional steps.
3. Your fixed asset $$ threshold should affect this. If you can expense a $700 dollar laptop, you can can expense a subscription (or whatever type).
4. Basic periodical subscriptions....I don't bother. Software subscriptions, then $ amount matters....also see number 3.
Maybe I am missing some but those are the main ones. In short, one must be able to rationalize the treatment and be able to defend it to the auditors.
Thanks Emerson.
This is in regard to things like hardware/software maintenance/service contracts and small health department licenses. In theory, with their lives being one year and the amounts being between 5000 and 10000, I want to spread them over the life of the benefits derived. Previously, they were done as period expense, which I feel is not properly done.
As these amounts are well below our auditors' materiality threshold, they are pretty much just a nuisance item, but they do cause us variances to budget that require explanation.
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You are on the right track. Your problem is actually the nuisance and not the threshold level. I would focus (or address) more on #2 or how to achieve the state where there is no/minimum action/processes required after invoice input/encoding. Where the system amortizes the expense automatically. It will not matter whether the invoice/payment is $1 or $10k.
If the useful life is one year, as you state, then such costs 12th each month over the course of said year. The same as you'd do for a 12 month insurance policy. Some think this is overkill, but if you are reporting monthly (to management for example), you don't want 12 months worth of insurance(or any similar item) showing up all in a single month. Set up the accrual as an automatic recurring entry in your accounting system for 12 months.
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Sorry, I meant to write "If the useful life is one year, as you state, then ACCRUE such costs, 1/12th each month over the course of said year."