Selling fixed assets -- top line revenue or gain/loss "Other income"

Answering the 3rd Part of Your Question:

"Spares" is the technical accounting term for this situation:

"Just to make my life more complicated, this real world client of mine also removes small to major parts of one piece of equipment and puts it on other fixed asset items to enhance or repair them, or may sell a removeable part of the equipment, say a camera head. No good tracking system for that process -- so the accounting? Don't ask! By the way -- these aren't cheap items -- $10,000 to $50,000 a piece."

Spares are capitalized and depreciated at the moment they are ready and available for use, regardless of when they might be considered placed into service.

The new IRS repair regulations discuss tax treatment for spares as well and essentially mimics this treatment.

I am from the Wireless industry and spares are a big part of the fixed asset puzzle. They get purchased and look like part of the self build inventory but are actually to be depreciated for book purposes when they are ready and available for use.

Here is where you might want to hire me to set up your fixed asset accounting procedures and train your team. Let me know.

Accounting for spares is difficult especially if you have a lot of install and decomissioning due to repairs and maintenance and warranty tracking. Its easy to get lost really fast. This is why companies set up asset tracking systems and bar code swipe everything.

If your spares are valued at 10K to 50K, these are not immaterial, and you will need to set up accounting policy and procedure and valuation guidelines around them. This includes instruction to purchasing about how to set up the PO and code through the system includes instruction to the shop as well about additional tracking for warranty returns etc. It gets very complex and the answer is beyond the scope of what I can help you with here.

The word you need for research is "Spares" or "Accounting for Spares."

Hypothetical #2 -- a company is in a business relating to speciality scientific equipment. They sell, rent, repair, and provide in-field services using skilled labor and some of the specialty equipment. They do not manufacture. So they usually buy the equipment as fixed assets (for rent or for in field services), as well as buy some specifically to resell at a profit (those are usually accounted for as a quick buy/sell, or left in inventory for a month or two until sold). However, this company often, and with little identity control, also sells off rental assets or field service equipment if a customer asks for a deal.

Since the "sale of scientific equipment" is part of their ongoing business model and objective, are these fixed assets sales now "Revenues/COGS", or still "Other income" as a gain/loss on disposal? I would argue it goes into revenues, since "sales of equipment" is a key business objective. Does it really matter if it went into fixed assets or inventory first -- I say no, but I welcome support or counter arguments.

Answering Your Hypothetical #2

Yes - you will need to determine the revenue and cogs related to the sale of equipment. Ordinarily it would be ideal if you could separate the equipment being sold from the equipment being rented from the equipment being used in service delivery.

Next - you need to get a copy of the contract that specifies the terms of the deal. If the rented equipment is then sold at a point in time based on milestones or other criteria there may be a period of rental income and revenue from the sale. If there is rental income, the deal maybe an operating lease or a capital lease. If you are renting and during that time retain the economic benefits and risks of ownership then you will incur depreciation expense.

I cannot really give you a good answer because you have not provided all the details needed to unwind the scenario properly.

You might consider at this time hiring a CPA to act as your controller.

Wow Valerie, that is certainly a thorough answer. Thanks, I really do appreciate all the time and effort you put into that. I did not mean it to get too overly complex.

This is a small company. Under $10mm revs and barely 10 employees, including one very low level accounting clerk. They have a monthly CPA visit to file state returns and post some entries -- but clearly they have not clarified this question. I am their 2-3 days a quarter CFO at most, helping the CEO on strategy and planning, and with the bank relationship.

Hypothetical #1 was just to set a comparative stance. I am already OK on what to do there, if that was our case. The core issue under #2 is whether we can definitely post the fixed asset sale into Revs/COGS as opposed to "Other income net gain/loss" given that the company does sell these kinds of items, new or used, as a key business line. i.e. it is probably a GAAP revenue recognition issue. The exact same equipment model may start out in fixed assets and be rented or used in the field for 6 months, then get sold. Or it may go via inventory as equipment held for resale (usually to an already identified customer). And no, there is no tracking in fixed assets of whether equipment is originally for rent, field service or possible later sale, and there never will be. It is all fungible stuff. That is my "internal control" dilemma, but that won't change at this company size.

I am sticking with post to revenues and COGS.

On your hypothetical #2 you will need to review the contracts in combination with revenue recognition concepts for companies that sell goods and service or a combination of both. If you are working with lease agreements this will be more complex.

Ask the visiting CPA to review the transactions. If the CPA is from a firm they will have a library of resources to review and provide you with a best answer.

Many companies make the mistake of saying we are small so we don't need to worry about that. Eventually it will matter and it is always easier to establish a long term solution early so as things become more complex you have a better time of recognizing those developments early.