Hello Community!

I have a question that is deeply-rooted in your unique Finance processes and I would like to start a dialogue on whether there's more perspectives on how to look at these scenarios.  Below, I will hash out a Finance scenario and pose some questions.  I would love to understand how others have approached these questions, and ultimately, what kind of decisions are made as a result.

Example scenario #1:

• "Vendor A" is a SI partner working on one of my major strategic projects and they invoiced me $1M in January.
  • As a customer, I prepaid this amount for work to be completed in the month of January
• "Vendor A" provides me with an invoice, broken out into the following lines:
  • $500k in Labor
  • $200k network devices procured from Cisco
  • $300k servers procured from Dell
• Cisco and Dell are also my vendors and I get invoiced from them separately
• In January, the $500k gets booked to a labor account code, standalone line item
• In January, the $200k and $300k both get booked into the Balance Sheet and subsequently depreciation is charged against those
  • The amount charged in January for the depreciation against the Cisco and Dell gear should be coded to Cisco, and Dell vendors, respectively HOWEVER:
    • Usually, they’re not coded to a vendor at all, and can’t be allocated based on the source data
    • If they are coded to a vendor, it might be coded to "Vendor A" and not Cisco/Dell
      • The customer might want to see it one way OR the other

Questions from Scenario #1:

• What happens if the amount is NOT prepaid and is instead accrued?
• If accrued, how does the accrual hit OpEx?  How do you explain reconciliation months in reporting?
  • For example, your accrual was way off for 6 months and it gets reconciled after your latest invoice.  How do you explain the reporting anomaly to your stakeholders?  Will your stakeholders understand why this happened?
• What happens if the $200k and $300k gets capitalized into a project instead of going into Assets and depreciating?
  • This would mean those amounts should come through in CapEx model in the month that they're invoiced
    • So in January, I see $500k OpEx Labor, $500k CapEx for the same vendor, then I should see the same portion of the $500k CapEx depreciating in Fixed Assets once the project is in its useful life
      • In this scenario, how do I know what chunk of the depreciating project asset is related to the $200k and $300k? 
      • Even if I can identify those costs, will they be coded to Cisco/Dell?
      • If you get invoiced quarterly, how did you accrue the CapEx amounts in CIP leading up to the first invoice?
• Do you budget at the same dimensions?
  
  • If you know that 20% of your project asset should be coded to "Cisco", do you then budget your assets at the individual asset level and consider the "Sub-vendor" cost breakouts?

Example Scenario #2:

• I have a prepaid maintenance agreement with “Vendor A”
  • $1.2 M pre-paid to be consumed at a consistent rate of $100k/month for 1 full year
• In January, I get invoiced by “Vendor A” for $1M for the annual agreement, to be fully consumed by December 31st
• In January GL, I have one line item in the GL that hit my maintenance expense account for $1M that is coded to “Vendor A” at the invoice level
• To reflect that only $100k of the agreement was consumed in January, I will subsequently have a separate entry in January for -$1.1M (CR Expense Account, DR Prepaid Asset) so that the two line items net out to the amount incurred in the January

Questions from Scenario #2

• Are the corresponding credits also coded to "Vendor A"?
  • If not, how much effort would be involved to get those coded to "Vendor A"?  Is it worth it to provide a monthly schedule to align these to the proper vendors?
• Do the credits ever aggregate at the vendor level?
  
  • If they are aggregated at the vendor level, do you have any situations like Example Scenario #1 where some of those costs will need to get broken out to "Sub-vendors"?
• Where do you expect to see the $1.1M from a January perspective?
  
  • It should not appear in the CapEx model, so
    • Should I expect to see a line item for $100k in February GL coded to the same vendor? 
    • Will subsequent month expensed amounts be coded to "Vendor A"?

Some of the answers to these questions is a matter of proper accounting practices.  Some of the answers to these questions will depend on how you are invoiced by vendors, accrue expenses, and capitalize costs.  I want to start the discussion and understand what is important to you.  I don't expect that responses will be direct answers to the questions posed above, but rather stories or examples of how you may have been faced with the above questions, and what you did to ultimately create something of value.

Cheers,

David