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Divergent financial reporting practices

Because of the unique nature of maintenance, repair and overhaul (MRO) transactions, the diversified group of providers and the lack of specific generally accepted accounting principles (GAAP), certain financial reporting practices have emerged in the industry. Companies should understand these practices and consider its implications on their financial reporting policies.

 

Here are some of the most common issues:

 

Revenue recognition model

 

Some companies apply the “separately priced maintenance” model (ASC 605-20-25), while others apply SAB 104 (under ASC 605-25). At PwC, we believe that it is acceptable to apply ASC 605-20-25 to separately priced extended warranty and product maintenance contracts offered by a service provider that is primarily obligated to fulfil such contracts, whether or not they also sell the underlying products. We understand, however, that at least some members of the SEC staff believe ASC 605-20-25 is applicable only to the original equipment manufacturer (OEM) or retailer/distributor that also sells the underlying products.

 

What is the difference between these two models? Well, for short-term transactions, the answer may be: “none”. But for long-term agreements, such as power-by-the-hour contracts, the maintenance model provides for revenue recognised in proportion to cost, whereas the SAB 104 model requires an output, or “proportional performance” model. The proportional performance model may or may not be similar to proportionate cost, depending on the facts and circumstances. The other difference between the two models is in the recognition of losses. The maintenance model requires the recognition of losses whereas SAB 104 does not. The important thing here is to consider the facts and circumstances of the arrangement and document the company’s rationale when considering the accounting model.

 

Changes in estimates – cumulative catch-up versus prospective method

 

Another area relates to the accounting for changes in estimates on long-term maintenance contracts. Should a company use the cumulative catch-up or the prospective method? In practice, both methods are used to account for changes in estimates. The guidance in ASC 250 is not clear with respect to recognition of a change in estimate in the “period of change”, particularly as it relates to revenue recognition models based on longer-term estimates of either costs, revenues, or both. ASC 605-35 and ASC 980-605-25 (Revenue Recognition, Regulated Operations) provide for the use of the cumulative catch-up method.

 

We believe it is acceptable for MRO providers using the proportionate cost method of revenue recognition under ASC 605-20-25 to use the cumulative catch-up method by analogy because of the similarities to the cost-to-cost model under ASC 605-35. We also believe that the prospective method is acceptable and supported by GAAP. But again, companies should be aware that both methods are used in practice and understand how their organisation compares to their peers and the basis for their policy.

 

Rotable pool assets and exchanges

 

Some companies report rotable pool assets as inventory while others report them as fixed assets. The Airline Industry Guide is the only area of GAAP with specific guidance on rotable pool assets and it specifies treatment as a fixed asset. We believe this appropriate for airlines as they use these assets to install on their own equipment. An MRO provider however, uses the rotable pool assets for the purpose of generating revenue by performing MRO activities, as opposed to maintaining an aircraft. Therefore, we believe MRO providers should generally classify rotable pool assets as inventory because they are effectively sold to customers as part of their maintenance contracts.

 

Another complex issue relates to revenue recognition for rotable pool asset exchanges. In practice, there are numerous forms of exchanges that create the complexity. Some transactions are time and materials, some are fixed price. For example, an MRO provider may supply a customer with a refurbished asset while the customer’s asset is being overhauled. Upon completion of the overhaul, the parties may exchange the loaned asset for the refurbished asset or, instead, may agree to swap titles to each asset rather than physically exchanging them. In other transactions, assets and titles may be exchanged at the agreements’ inception based on a product sale with a trade-in allowance. These transactions are different in form but may have the same or similar economics. Accordingly, determining the appropriate accounting requires careful consideration of the facts and circumstances to evaluate whether the transaction includes a lease, a purchase and sale, or an MRO activity. In practice, many companies may have a singular revenue model for rotable pool exchanges, which does not necessarily fit all the various forms of transactions. Companies should consider their policies and practices to make sure they are appropriate in each circumstance.

 

While these are the most typical issues encountered in MRO financial reporting, there are also several others. For more information on these issues, as well as some examples, please click here.

 

 

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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05/08/2015 08:17
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Maharishi Markandeshwar University, Mullana - Ambala, erstwhile known as Maharishi Markandeshwar Education Trust was founded with the objective of social, educational and economic upliftment of society in the year 1993, in the name of Lord Shiva's devotee, "Maharishi Markandeshwar Ji.
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MichaelKors11
15/08/2015 11:37
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Packers and Movers Bangalore
25/08/2015 17:33
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