How to record purchase of clients in your books?

Let's say you purchased someone else's customers (as you often find people selling here). It cost you $1000. How do you record this sort of transaction in your accounting/bookkeeping? Is there a particular category or account you should be using for the purchase?

This has always been an interesting topic when I've discussed it with peers in industry. The answer is, well, it depends!
Your obviously not a public reporting issuer, so the bottom line is you can do whatever you want, so long as your tax agency agrees.
IAS38 (similar treatment as US GAAP) talks about intangible assets. To qualify as an intangible asset, these conditions have to be meet:
1 - You can identify the asset specifically and the fair value
2 - You have control over the asset (ability to obtain benefits)
3 - There must be future economic benefits
I agree in the purchase of specific clients you have meet criteria #1 and #3. However, your company has no control over these customers as they could leave at any time. Therefore, this is not likely an intangible asset under IFRS or US GAAP.
Goodwill is an interesting place where this can go. This is essientially price paid over the fair value of the asset (the fair value of the asset is zero, it has no value as the customer can cancel tomorrow).
Generally, you could recognize the purchase as Goodwill related to acquired clients. This Goodwill is not amortized under IFRS, it just sits as an asset on your balance sheet. However, ever year you should test the impairment of the goodwill. This number will decrease if these clients leave. You can test impairment by looking at the future cash flows related to these specific clients and discount them at your capital cost (NPV). Any difference between the value of your projected cash flows and the goodwill will need to be expensed as "Goodwill Impairment Expense."
You can read IAS38, IAS3 or US GAAP SFAS 142 for more information on intangible assets.
I would expect most hosts just write it off to expense, but I don't think this is the best way to treat it and it's certainly not in compliance with IFRS/GAAP. I can imagine the tax man would like my approach better too.
Just note if you acquire a client where you have obligations in the future, you MUST recognize the liability and revenue, even if you do not earn any cash from the client. This is often overlooked, but makes sense when you think of the matching principle... you get to recongize the costs of hosting the client, so you need to recognize the revenue.
Anyways, you need to talk to an accountant to properly prepare financial statements and tax returns. This is just meant to be a general overview, not a recommendation for your specific circumstance. Please do not use this advice without consulting someone individually about your circumstances. I can see a variety of methods to account for this, and some may be better or more accurate under specific circumstances. Acquisition of assets is an interested and complicated area of accountancy and you need expert advice before sending in the tax forms.

Thanks very much edgemedia for the long and informative post! I don't know if this will make any sense, but I am going to set up a new account in my QuickBooks which is type "Other Asset". I will then link it to use one of the 20xx tax lines for Intangible Assets. I looked up the definition of intangible assets and it is mentioned that a customer base can be considers as such an asset.
The following wiki contains info on Capital Assets and makes reference to Tangible as well.http://en.wikipedia.org/wiki/Capital_asset
How does this sound? I can't quite think of another way to do it.

Did you buy the full company or just a portion of its customers?





__________________Syntechnical.com
Linux Dedicated Server Tutorials
The social responsibility of a business is to increase its profits.

Just a portion of the clients, not the full company.

Yup, intangible asset would probably cover you in this situation. Just make sure that if any clients leave you write their portion of the purchase down as an expense.
Tax wise, it's very jurisdiction dependant regarding the treatment of such intangible assets. Some countries insist a 40 year write down on these assets, others suggest shorter periods, others still suggest you maintain the value until it is impaired. Talk to someone that can address this for you come tax time.





__________________GTM Investments Ltd. // Qualified financial expertise with hosting industry experience. Valuations, accounting, advisory, transaction support and brokerage. Hire an educated financial professional that knows your business.

We put the asset on our balance sheet at purchase price, and then compute impairment (once a year) based on any customers that leave. The amount of impairment is based on the % of the purchase price that the customer who left represented (i.e. proportional).

Interesting topic. I think in the past we wrote it off under a marketing purchase or something.. I'd have to go back, this was a few years ago. An Intangible asset is an interesting approach.





__________________
Conor Treacyhttp://www.handsonwebhosting.com