Introduction

This report presents an analysis of the costs that a buyer will incur from the point that it begins to explore its options up to the point that a supplier takes over day-to-day operations in a steady-state mode and accounting implications of the transfer of the ownership of IT assets from the buyer to the supplier in the outsourcing transaction. 

Scope

• Analysis of the costs that a buyer will incur from the point that it begins to explore its options up to the point that a supplier takes over day-to-day operations in a steady-state mode
• Accounting implications of the transfer of the ownership of IT assets from the buyer to the supplier in the outsourcing transaction

Contents

This report identifies changes in accounting principles that may impact the way in which buyers of the outsourcing services account for outsourcing costs. It is divided into four sections: Temptations in accounting for outsourcing costs, Timing of cost recognition, Recording of costs in accounting statements and Recording asset transfer to supplier as a lease. Each section contains 4-6 key messages, with supporting data and analyses. For example, the Timing of Cost recognition section contains the following insights:

• Timing of income statement treatment of exit/restructuring and transition/transformation costs differs; hence it is important to clearly differentiate between these costs
• Deferment of the recognition of expenses that are re-billed later by a supplier is not allowable in most cases
• Capitalizing transition/transformation costs is not plausible in most cases