Revenue Recognition – Milestone Method

Does your business provide research and development services using a milestone arrangement? The new FASB standards in ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method. Research and development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a drug study or achieving a specific result from a research and development effort. An entity that recognizes these milestone payments as revenue in their entirety upon achieving the related milestone is using the milestone method. Continue reading »

Revenue Recognition is changing for Tech Companies and Others with Multiple Deliverables

Submitted by Don Gutman

One of the constant accounting challenges companies face is the development of an appropriate revenue recognition model for the broad array of products and services they sell to customers.  We have seen many examples of public companies restating financial statements as a result of using inappropriate revenue recognition methods.  A classic example of this issue can be found in the cell phone industry where it is common for the seller to provide a free phone, a multiple-year service contract and other services all in one contract with the customer.   The customer in turn may pay a one-time activation fee, a highly discounted fee for the phone and a separate monthly fee for the basic service.   In this fairly basic example, products have been delivered, cash flows have started and a reasonable expectation of future payments exists. Continue reading »

Updated FASB Guidance for Revenue Arrangements That Include Software Elements

Does your business sell a product that includes a software component that is essential to the product’s overall functionality? If so, the newly approved FASB Accounting Standards Update (ASU) (2009-14) provides guidance that will be applied prospectively for revenue arrangements entered into or materially modified for fiscal years beginning on or after June 15, 2010, and early adoption is permitted.

The FASB standards require that all hardware components of a tangible product containing software components be excluded from software revenue recognition guidance Continue reading »

REVENUE RECOGNITION FOR MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS – EARLY ADOPT FOR 2009?

Do you have multiple-deliverable revenue arrangements (MDRAs)?  Do you fail the criteria in existing GAAP (EITF 00-21) to be able to separate out multiple-deliverables for revenue recognition.  If so, a newly approved FASB Accounting Standards Update (ASU) (2009-13) may provide you relief and you may want to early adopt this standard for 2009.  Otherwise it will apply prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. 

“Currently, the absence of vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of selling price of the undelivered item in an arrangement is a common reason that vendors are unable to separate deliverables in an arrangement.  In those situations, the timing of revenue recognition may be (required to be) deferred until the delivery of the last deliverable or the entire fee may be recognized over the period during which the last deliverable is delivered or performed.”  (FASB ASC 605).  Many have found the existing rules a hardship and not reflective of the underlying economics.  The new rules will require allocation of the overall consideration to each deliverable using the estimated selling price based on VSOE, if available, TPE, if VSOE is not available, or the company’s estimated selling price if VSOE and TPE are not available.  The new rules will result in more MDRAs being divided into separate units of accounting than under the current rules.  This is called the relative selling price method. 

The FASB standards include a number of examples to help you apply the new rules.  Examples includes cell phone sales multi-year service contracts, sales of bundled equipment that is sold separately by others, construction equipment sold with installation included, autos sold with included scheduled maintenance services, home appliances sold sometimes with bundled installation and maintenance services, bundled/unbundled human resources outsourcing services, sale of complex medical equipment with installation and supplies, sales of computer equipment including CPE, monitor and keyboard, fabric sold for use in manufacturing clothing sold with certain double-money-back guarantees, building painting services sold with or without paint included, bundled/unbundled farm equipment sold, biotech enters into an agreement with a pharmaceutical related to licensing rights and provision of research and development services   Of course, the new rules require significant additional footnote disclosures to help the readers understand the revenue recognition policies.  Read FASB ASU