Monthly
amortization and
recognition of
Deferred Income,
Revenue, Fees,
Prepaid Assets,
Expenses,
Deferred Charges
determined as
the
GREATER
of
Straight line
amortization or
Balance
remaining,
monthly
takedown,
running
consumption of
• Time
- Hours
- Days
- Other
increments
•
Tangibles
- Inventory
- Products
- Supplies,
office or
otherwise
- Other physical
count or
takedown usage
• Dollars
- Remaining
balance
•
Virtually any
type of item
with a declining
life expressible
in units |
Example:
Consumption and
Amortization by
HOURS
A $24,000.00
prepaid fee
covering 1200
hours of service
over a 12 month
term.
Payer
capitalizes the
$24,000.00
deferral to a
prepaid
asset/expense.
(a prepaid
amount could
just as easily
represent the
cost of
inventoried
physical goods)
Provider credits
the $24,000.00
deferral to an
unearned
liability.
Amortizing the
fee on a
straight line
basis presumes a
monthly
consumption rate
of 100 hours.
Payer expenses
$2,000.00 per
month.
Provider
recognizes the
same monthly
amount as
income.
However, what if
hours (or any
underlying value
type) are
reduced at a
completely
different rate?
What if 312
hours are used
the first month,
followed by 228,
then 367?
What should the
deferred balance
be after three
months when 907
hours have been
used?
$18,000.00?
75% of the
original
deferral?
When only 293
hours (less than
25%) remain
outstanding?
What if only one
six hours
remained? Or
none?
This
software
• Rectifies any
disparity
between
anticipated and
actual
amortization
• Maintains an
equitable
relationship
between a
deferral and its
underlying basis
In the above
example,
the software
would have
recognized
78.58%
(907/1200) of
the $12,000.00
by the third
month.
If less than 300
hours, including
zero hours, had
been used,
the software
would have
recognized 25%,
3 months of 12
under a straight
line basis.
|
How it works
On a monthly
basis, the
software imports
an Excel file
and
•
Calculates
accumulated
amortization of
deferred dollars
using a straight
line basis.
•
Determines which
of the following
is provided in
the file:
- Units consumed
to date (hours
in the above
example) or
- Units consumed
for that month
or
- Units
remaining.
•
Calculates the
percentage of
units consumed
to date compared
to total
beginning units.
•
Recognized the
greater of the
two calculation
results as
accumulated.
• Reads a
history file it
created "as of"
the previous
month.
•
Establishes the
amount to book
to the general
ledger this
month:
Difference
between last
month's history
accumulated and
this month's new
accumulated.
|
