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Outsourcing Essay

• Question 1: Is the accounting policy proposed by OSI to defer costs associated with the origination of the agreement an appropriate policy? What advice would you give OSI regarding its policy election?

Accounting policy proposed by OSI to defer costs is an appropriate policy. Cost should be deferred if they create or add value to an asset. In FASB Concept Statement No. 6, Par 25 states asset as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.” In the case of Outsourcing, management believes all up-front cost incurred are a necessary investment and will generate substantial profits through call revenue, therefore we could say the costs associated with the contract are part of revenue generating arrangement. This arrangement could be consider as an asset because revenue (Set-up and Call revenue) provides a future economic benefit, and this arrangement is controlled by Outsourcing Services, Inc.

• Question 2: If the accounting policy to defer costs is appropriate, what costs, if any, would be eligible?

Any cost directly relate to the revenue arrangement are considered eligible for deferral. SAB Topic 13Af provide descriptions of cost that are eligible for deferral. Eligible cost are in the case of Outsourcing are: a) $1,500,000 Direct costs to a third party to configure OSI – The direct cost is incremental direct cost incurred with third parties. (FAS-91 or ASC 605-20-25-4) b) $250,000 Sales Commission – allow deferring the cost under FTB 90-1 because it is associated with the contract. c) $50,000 corporate cost – corporate personnel dedicated to contract negotiation is direct loan origination costs, these cost are eligible for deferral under FASB Statement No. 91 or ASC 310-20-25-2.

• Question 3: If there are costs for which deferral is appropriate, what is the appropriate period over which to defer these costs

Utilizing matching principle: recognize deferred cost at the same time as related revenue is recognized. In the case of Outsourcing, they will recognize revenue over the estimated customer life, therefore the costs listed in question 2 are deferred and expensed over the period of 4.3 years. Both SAB Topic 13Af, question 4 and SC 605-20-25-4 state “acquisition of that contract (incremental direct acquisition costs) shall be deferred and charged to expense in proportion to the revenue recognized”.

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