My company offers services for ATM Machines where some customers buy the machines outright but we also have agreements where we share on the revenue earned at that location. The agreement is usually for 5 years but they still own the machine. My question is regarding if we should book this revenue to deferred revenue and spread it over 5 years or recognize in full in one month? Having said that, their previously policy was capitalizing the assets, but I am not sure if this was correct since they are selling the assets. I am trying to understand if we should be accounting for these as leased assets as they ownership does not revert back to the company. My logic says these assets should be a sale, but maybe I am missing something. Thanks for your help.
Fixed Asset / Leased Assets
Answers
Under ASC 842 for rules to determine lease classifications, one of the criteria is title transfer. In this case there is a title transfer where title of the ATM (or TYME machine as we say sometimes say here in Wisconsin), transfers to the customer. After the 5 years they also keep the machines. Therefore, I would classify as a sale. Which means the revenue should be recognized at the time of sale and not over 5 years. However, this is tricky in some respects because then you have to estimate future payments over the next five years which is based off of revenue derived from the machine so you can book the revenue in the year of sale.
Do you guys also service the machines over the five years or do you just basically sell them and then walk away and collect the fees over the next five years? Because, if you do service the ATMs you could argue under ASC 606 that the servicing is a separate contract from the sale and therefore you would recognize the revenue as the servicing was being performed over the five years.
Anyway, that's my two cents.