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Revenue recognitionWhat new requirements mean for the life sciences industry
What we'll discuss
1. The changes ahead2. The 5-Step model for the new revenue recognition standard3. Timing of revenue4. What it means for life sciences5. Learn more
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The Changes Ahead
INTRODUCTION
There is now a global accounting standard for revenue recognition.
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The Changes Ahead (cont.)
INTRODUCTION
• ASU 2014-09 has many life science companies wondering how they will be affected
oASC 605-25, Revenue Recognition: Multiple Element Arrangements; ASC 605-28, Revenue Recognition: Milestone Method; and ASC 605-30, Revenue Recognition: Rights to Use are superseded and replaced by ASC 606
oEffective for public entities in annual periods beginning after Dec. 15, 2016, and for private entities beginning after Dec. 15, 2017
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The 5-Step Model for the New Revenue Recognition Standard (ASU 2014-09)
1. Identify the contract with the customer2. Identify the performance obligations in the contract3. Determine the transaction price4. Allocate the transaction price to the performance obligations5. Recognize revenue when the entity satisfies each performance
obligation
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Get the full storyAvailable at grantthornton.com:
• Accounting for revenue impact on life sciences• A shift in the top line: The new global revenue standard is here
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Timing of revenue
• Variable pricing• Credit risk• Time value• Contract costs
Revenue is recognized as the work is performed if control over the promised goods or services is transferred to the customer over time.
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Timing of revenue: Specific Issues
• Noncash consideration• Rights of return and other customer options• Supplier repurchase options• Warranties• Principal versus agent (gross versus net)• Licensing intellectual property• Breakage• Nonrefundable upfront fees• Consignment and bill-and-hold arrangements
ASC 606 also provides specific guidance on various other transaction types, including:
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Timing of revenue: Disclosures
• Customer contracts, such as the remaining performance obligations (backlog)
• Key judgments made• Contract costs recognized as assets• The customer simultaneously receives and consumes the
benefits• The customer controls the asset as it is created or enhanced• The asset has no alternative use, and the supplier is entitled to
payment for performance-to-date and expects to fulfill the contract
ASC 606 will require considerably more disclosure about revenue, including information regarding:
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Timing of revenue: Multiple-element arrangements
• The customer benefits from the item on its own or along with other readily available resources
• The supplier does not provide a significant service of integrating the various performance obligations
A customer contract may cover a bundle of goods or services. ASC 606 requires performance obligations to be accounted for separately if distinct. For example:
If performance obligations are distinct, the contract price is allocated between them based on the estimated standalone selling price of each performance obligation.
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Timing of revenue: Transition and effective dateThe ASC 606 is effective for public entities in annual periods beginning after Dec. 15, 2016, including interim periods therein, and for private entities in annual periods beginning after Dec. 15, 2017.
Earlier application is prohibited for public entities. Private entities may adopt the guidance early in years beginning after Dec. 15, 2016.
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What it means for life sciences
• Multiple-element arrangements • Collaborative research arrangements • Variable consideration
o Milestone paymentso Volume discount incentiveso Additional purchase optionso Royalty arrangements
• License rightso Right to access versus right of use
• Right of return• Disclosures
ASC 606 is now the revenue recognition standard for:
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Contact us
Christine JanisProfessionals Standards Partner, AuditT 415.365.5438E [email protected]
GRANT THORNTON REVENUE RECOGNITION RESOURCES
Matt McClearyAudit, Senior ManagerT 919.881.2778E [email protected]
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