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After graduation, you began work at a moderately large, but rapidly growing, tech company in the bay area. The company’s primary sales revenue is generated by providing computational and data storage services to a variety of companies in the area. In particular, it often bundles the two together by selling rights to both access data storage at off-site ‘data warehouses’ and proprietary software which allows rapid data analysis. The new revenue recognition standard, ASC 606, has caused some changes in how the company booked its revenue. Previously, when it sold the two bundled together, it waited until all services were rendered to book any revenue. This caused revenue to occur in big, sudden ‘chunks’ at arbitrary periods of time when contracts were completed. Now, however, the revenue recognition team must separate the single sale in order to recognize revenue for each service over time. The new lease standard, ASC 842, however, has caused increased confusion, since right to use the data storage may a lease. Your team has been tasked to determine what the appropriate accounting treatment for a new contract that was recently signed in order to finalize adjustments to the company’s records for FYE 2018.The company has recently contracted with another large entity to provide both data storage and computation/analysis services. The contract takes effect on October 1, 2018 with payment due quarterly at the beginning of each calendar quarter, with the payment for the first quarter due immediately. The customer’s marginal borrowing rate is estimated to be 6%. The contract is to provide both data storage and data computation/analysis services through December 31, 2020, with an option to renew for one year until 2021, which the customer is expected to exercise. There are no options to purchase the equipment and the ownership of the equipment remains with us after the contract. In addition, there is no specific physical item being used, but instead a part of a large array of data storage and processing equipment, of which this entity’s contract only uses a fraction. The contract specifies payments of $7,500,000 each quarter but does not state whether it is for the data storage or data analysis. Data storage is capped at one petabyte (approximately 1,000 terabytes) of storage. The company sometimes sells excess storage capacity to outside parties at a rate of $200 per terabyte per month. The company does not sell its data analysis software without selling data storage since it is concerned about trade secrets being compromised. In-house analysts estimate, however, that if it ever did sell a license for its data analysis program, that it would charge at least $35,000,000 for a one-year license. In prior years, we deferred all revenue from such contracts all at once at the end of each contract-year, since companies did not tend to use our services in a linear way over the contact period, but instead had activity clustered around fiscal-end periods. Discuss and examine the impact of the change in accounting on the company’s December 31, 2018 financials. For grading, I will focus primarily on the analysis and communication that you provide. There is not necessarily a “right answer” that I will be looking for and I will not grade based on that your opinion, as long as it is well-justified and communicated. Instead, I want to be able to follow your own accounting and ethical decision-making clearly and to be able to not just understand what your decision(s) should be, but also why you feel that they are best, considering the impact on ALL the entity’s stakeholders, including yourself.

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