FASB ASC 340 Accounting for Other Assets and Deferred Costs
The Financial Accounting Standards Board (FASB) released Accounting Standards Codification 340 (ASC 340) to address other assets, such as prepaid expenses, and deferred costs.
The main subtopics included in this area are as follows:
- The capitalization of advertising costs
- Insurance Contracts that Do Not Transfer Insurance Risk
- Capitalized Bond Issuance Costs – these are preferred to be amortized using the effective interest method however straight line is acceptable too
- Certain long lived assets
When discussing prepaid expenses, they discuss the definition of what a prepaid is and that it includes things such as insurance, interest, rents, taxes, unused royalties, paid advertising not received, and operating supplies. The topic ASC 310 discusses the finer points of how to account for each of the different types of prepaid expenses and deferred costs and how to properly account for them given the certain circumstances that each of them present.
Capitalizing Pre-production Costs per ASC 340-10-25
The FASB created certain rules regarding the accounting treatment for creating assets such as dies and molds for products that a company will sell over the course of time to customers. For example, the costs related to the design and development of the end product must be expensed as incurred. Designing the actual dies and tools to make the product are to be capitalized as part of the equipment used to make it, assuming the designer retains ownership of the tools. If these items are not owned by the maker, then they should be expensed as incurred, unless there is a binding contract with the customer that states what costs are to be reimbursable.
Direct Response Advertising per ASC 340-20
Those costs which are considered to be direct response advertising qualify for capitalization, which is an exception to the normal treatment of advertising which requires expensing the costs in the period incurred.
Insurance Deposits per ASC 340-30
This is applicable to companies that have business in insurance. Specifically, these companies would engage in insurance or reinsurance arrangements that don’t transfer risk, or one where the risk is not able to be measured. Because the risks are not transferred, an asset or liability should be booked at the time of inception. Subsequent measurement is calculated based on yield of previous and future payments, and is consistent with the methodology described in ASC 310.
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