Basic Accounting Question....

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12thManFan

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Say that a company is thinking of signing a ten year IT contract to provide ERP and CRM support (hardware and software, plus training and support). Cost is roughly $6-7M a year. Would this be listed as an expense, or can it be capitalilzed?

I'm guessing it's an expense...just hoping otherwise...
 
The Company providing the support would record Cost of Revenue for most of the expenses involved in providing the services.
 
You might disclose the commitment, but you would recognize each years expense in the year it is incurred, not all up front.
 
It could be capitalized if this was a service used to setup the ERP and getting it to run properly. For maintenance like in your case it's an expense, and like someone said, it's recognized as the expense is incurred to satisfy the matching principle.
 
Is the expense likely to benefit future periods, i.e. are you likely to realize the benefits of this in the future? If so, capitalize. Otherwise, expense. In this case, my guess would be that this is an expense.
 
My bad...I think I misunderstood the question. The company receiving the benefit would capitalize all costs used to establish the asset (i.e. training, setup, transportation, etc.). Maintenance and other such expenses after the system has been setup would be expensed based on the matching principle. If the company were to hire someone to come in and make improvements on the existing technology, those costs would be capitalized as well over the life of the asset, or the life of the improvement (whichever is shorter).

Based on the question, you should also realize that when a company signs a contract to purchase "setup" of such a system, they aren't normally billed say $6M a year for 10 years for everything. Normally the contract will state that the technology is worth X amount, and that annual maint. is worth X amount...just something to consider as well.
 
Setup (i.e. installation, building the shiznick out, testing, etc.) is capitalized. Training can not be capitalized. Support is expensed in the year it is incurred.
 
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