GAAP Geek question: Have company with contract for 1000+ phones used as rental devices (i.e. generating revenue.) Contract has no cost on phone (normally a $700+ smartphone) but $350 early termination. I'm thinking I need to capitalize the 2 year agreement (PV of monthly payments) and allocate portion to the FMV of the phone, balance to ?? Or other options? Looking for GAAP guidance.
Cell phone early termination penalty as contingent liability
Answers
Basic GAAP guidance on contingent liabilities depends on if the likelihood of an early termination taking place (and thus a penalty ensuing) is remote, possible, or probable:
If likelihood is remote, no accrual or disclosure is required.
If likelihood is possible, disclose such in the financial statement notes, but no accrual is required.
If likelihood is probable, disclose in the notes and accrue in the financial statements accordingly.
Hope this helps.
There is also materiality to consider. If you terminated all contracts, would there be a material impact on your financials? If the integrity of your statements is critical for investors, would they second guess committing capital to your venture because of your likelihood to cancel? I believe this falls into one of those categories where being technically correct will be cost prohibitive to maintain, and will not provide any benefit.
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