A key customer that we have a LTA contract with wants us to acquire another supplier of theirs which at present is a facility owned by a large public company. The cost to acquire the supplier is ~$1M. Currently the supplier is break-even to slightly negative from a profit perspective. To compensate for this and encourage the acquisition, our customer is offering us a 25% price markup for 3 yrs on all parts they sell and will prepay $3M of the markup upfront. In essence, the customer is paying us $3M and the cost of the business if $1M so we are profiting $2M by the transaction.
Separately, our customer was well short on volume commitments on a separate program under the LTA and as a result, our company incurred significant losses from lost absorption coverage, upfront tooling costs, etc. The LTA has a good faith clause that says that customer and supplier will negotiate a mutually agreeable solution. They have acknowledged our loss and are willing to offer a prepayment of $4M for future sales on this program but don't want to mention that it is a repayment for past losses.
We are trying to word the LTA amendment with our customer to allow for some revenue recognition up front rather than deferring the $3M and recognizing as acquired business delivers parts over 3 yrs. Does anyone have idea on how this might be justifiable from a GAAP perspective? We are trying to word the amendment to tie in as repayment of previous losses to allow for earlier recognition.
Separately, our customer was well short on volume commitments on a separate program under the LTA and as a result, our company incurred significant losses from lost absorption coverage, upfront tooling costs, etc. The LTA has a good faith clause that says that customer and supplier will negotiate a mutually agreeable solution. They have acknowledged our loss and are willing to offer a prepayment of $4M for future sales on this program but don't want to mention that it is a repayment for past losses.
We are trying to word the LTA amendment with our customer to allow for some revenue recognition up front rather than deferring the $3M and recognizing as acquired business delivers parts over 3 yrs. Does anyone have idea on how this might be justifiable from a GAAP perspective? We are trying to word the amendment to tie in as repayment of previous losses to allow for earlier recognition.