Australia Asset or Opex

[Monack]

Asset or Expense when customer pays up front (urgent help)

HI

I work for a company that installs equipment into a residents home (the customer pays upfront for this service which includes labour and materials cost), the revenue ongoing is related to the maintenance contract that the company has with the customer where technical standards and legistation requires specific maintenance compliance.

The company has always accounted for the initial service as capital, however they are now having the debate of whether it should be an expense transaction as the revenue stream is related to the maintenance contract rather than the intial install (revenue already received from customer for intial install). That being said if there was no initial install of the equipment the continued revenue would not apply from the maintenance contract. The equipment installed is not materilally significant from a $ value, however the volume of customer that receive the installation makes the asset value significant. In addition, going forward the comapny could sell off this part of the company as a going concern which from my perspective the company would want to continue to capture the intial install in the balance sheet as that is what a potential buyer would make there money on with a maintenance contract.

From this information could you advise if the intial service si an asset or expense and why???

Thanks for any clarity you can provide.

 

[Triest123]

If the initial service paid by the customer is fully recognised as revenue, then the costs of the initial service should be recognised as expenses.

In other words, the initial service (i.e. the equipment included installation) is the asset of the customer.