Download US GAAP: Issues and Solutions for the Pharmaceuticals and Life Sciences Industries

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Revenue recognition—Milestone method
54.Milestone method of revenue recognition—Sales based milestones
Background
Relevant guidance
Company A has made the accounting policy election to apply
the milestone method of revenue recognition to any substantive
milestones that are achieved. In the current year, Company A
entered into an arrangement with Company B whereby
Company A has agreed to provide to Company B a license to
use its intellectual property. In return, Company B has paid
Company A an upfront fee of $10 million and will pay Company A
an additional $20 million if Company B’s annual sales exceed
$250Â million.
The guidance in this Subtopic shall be met in order for vendor
to recognize… consideration that is contingent upon the
achievement of a substantive milestone in its entirety [as
revenue] in the period in which the milestone is achieved
[ASC 605–28–25–1].
If the consideration from an individual milestone is not
considered to relate solely to past performance, a vendor is not
precluded from using the milestone method for other milestones
in the arrangement [ASC 605–28–25–3].
How should Company A account
for the contingent milestone
consideration of $20 million? 
Solution
The $20 million milestone represents a sales based milestone that is similar to a royalty. Sales based milestones generally do not fall
within the scope of ASC 605–28 since the achievement of the targeted sales levels is not based in whole or in part on the vendor’s
performance and is not a research or development deliverable.
In most situations, all contingencies associated with sales based milestones have been resolved upon receipt of the sales based
milestone and no remaining performance obligations exist relating to the payment. As a result, sales based milestones could
be recognized in revenue when earned. However, if the vendor has remaining obligations to the customer at the time the sales
based milestone is achieved, the consideration received from the sales based milestone may need to be combined with any other
arrangement consideration and allocated to the deliverables in the arrangement.
In this example, Company A has no remaining obligations after the initial license is provided to Company B. As a result, when the
sales based milestone is achieved, Company A would recognize the full amount of the sales based milestone in revenue.
PwC
71
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