Maintenance Contracts

Maintenance Contracts

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We use a deferred nominal account to put annual maintenance contract values in when invoiced. (Or credited) And then every month we take one twelfth of each of the preceding 12 months total values to add to the P&L. Smooths out the highs and lows. Been doing it like that for 30 years or so. Is there a better way? 

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By paul.benny
30th Nov 2021 12:33

That's accruals accounting.
But it depends how material these contracts are to your business and whether you want/need to report monthly results. Many a time, I've seen businesses putting a lot of effort prepaying trivial amounts.

I've assume that you're referring to cost. If these are income, you absolutely have to account for the revenue over the life of the contract to match with the costs of providing the maintenance.

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Replying to paul.benny:
By Hugo Fair
30th Nov 2021 15:56

100% agree on all 3 points ...materiality to business, frequency of accounts and necessity if income.

But to expand on 3rd point - "account for the revenue over the life of the contract to match with the costs of providing the maintenance":
* this may not be as simple as dividing into equal monthly 'instalments'
* if maintenance contract is hybrid of annual service + breakdown insurance, then your historical data may indicate the %age to recognise when service is delivered (with remaining %age split over the 12 months)

For instance, a software maintenance contract often covers 3 components - legislative-driven updates, patches for urgent fixes, access to helpdesk or support services. The first of these is schedulable (typically twice p.a.), the second isn't but historical records should provide a reliable indicator, whilst the third part will vary from client to client.
In short there is no 'one size fits all' set of ratios ... but each company/client should be able to arrive at an accounting policy for treatment of maintenance revenues that reflects their business (and can be reviewed before each year).

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