Revenue+Recognition

 "**EITF Reaches Five Final Consensuses (** milestone method of revenue recognition) ," KPMG Defining Issues, March 2010 --- http://www.us.kpmg.com/ microsite/DefiningIssues/2010/ di-10-15-eitf-reaches-five- final-consensuses.pdf The FASB’s Emerging Issues Task Force reached five final Consensuses on the milestone method of revenue recognition, insurers’ accounting for majority-ownership interests in mutual funds owned through a separate account, casino base jackpot liabilities, the effect of a loan modification when the loan is part of a pool of acquired loans that deteriorated in credit quality prior to acquisition and the pool is accounted for as a single asset, and the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity security trades.1 Proposed Consensuses were reached on health care entity issues concerning the presentation of insurance claims and related insurance recoveries and measuring charity care for disclosure. The Task Force also discussed revenue recognition for health care entities and deferred acquisition costs for insurance contracts. n a separate action, the SEC staff announced at the meeting temporary guidance related to Venezuelan foreign currency issues. The FASB is expected to ratify the new Consensuses at its March 31 meeting and, if it does, the Consensuses will become authoritative GAAP. The proposed Consensuses will be exposed for public comment if the FASB gives its approval at its March 31 meeting and will be considered at a future EITF meeting. EITF 08-9 provides guidance on applying the milestone method to milestone payments for achieving specified performance measures when those payments are related to uncertain future events. Under the final Consensus, the scope of this Issue is limited to transactions involving research or development if the milestone payment is to be recognized in its entirety in the period the milestone is achieved. The milestone method should not be applied to transactions within the scope of other authoritative literature on revenue recognition (i.e., construction contract accounting). Entities can make an accounting policy election to recognize arrangement consideration received for achieving specified performance measures during the period in which the milestones are achieved, provided certain criteria are met. Although the milestone method is an accounting policy election, other methods that would result in recognizing a milestone in its entirety during the period it was achieved would not be acceptable for milestones if the criteria are not met. Under the EITF’s final Consensus, the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. The Task Force agreed that whether a milestone is substantive is a judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed. There can be more than one milestone in an arrangement. A simplified example that Defining Issues has published before illustrates the revenue recognition question related to milestones. Assume that all other relevant revenue-recognition criteria are met and the only question is the pattern of revenue recognition. Bio agrees to perform research-and-development services on a new drug for Pharma and is to be reimbursed at a rate of $200 per hour. Pharma agrees to pay Bio an additional $5 million if clinical trials are successfully completed. The trials are expected to be completed by the expiration of approximately half of the project’s expected total of 50,000 hours. Bio performs 30,000 hours of services during the reporting period in which the agreement begins; clinical trials are successfully completed; and Bio continues to believe that 50,000 hours of service will be required to perform under the agreement. Pharma has paid Bio $11 million during the period: $6 million for the 30,000 hours of R&D service provided plus $5 million for successfully completing the clinical trials. An additional $4 million in fees is expected to be received as the remaining 20,000 hours of service are provided in future periods. What is the timing and amount of revenue that should be recognized? Assuming that the milestone was determined to be substantive, the $5 million milestone payment would be recognized as a performance bonus when the clinical trials are successfully completed. Continued in article EITF documents can be downloaded from http://www.fasb.org/jsp/FASB/ Page/PreCodSectionPage&cid= 1218220137031 Bob Jensen's threads on revenue recognition are at http://www.trinity.edu/ rjensen/ecommerce/eitf01.htm
 * Milestone Method of Revenue Recognition (EITF 08-9) **