Clarification of collaborative arrangements under ASU 2018-18 is here!
Clarification of collaborative arrangements under ASU 2018-18 is here!

Clarification of collaborative arrangements under ASU 2018-18 is here!

A couple weeks ago, the FASB issued Accounting Standards Update 2018-18, Clarifying the Interaction between Topic 808 and Topic 606. This new ASU applies to companies that have collaborative arrangements, or agreements that involve two parties that actively participate in a joint operating activity.

What is a collaborative arrangement?

Before we get into why this ASU was necessary, let’s get a good grasp on collaborative arrangements. The FASB defines collaborative arrangements as a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success. Basically, each party has a similar interest in the success of an activity and they join forces. These are particularly common in the pharmaceutical, life science and biotechnology industries. A common example is two medical companies that develop a new drug together. If the drug is successful, then the companies would share the revenues. Before ASC 606 became effective, companies would look into if the activities were part of its ongoing or central operations and apply legacy revenue recognition guidance. When activities were not part of its central operations, often companies would not present the income as revenue. There was already diversity in practice, and the release of ASC 606 raised more questions!

The current guidance in ASC 808 provides presentation and disclosure guidance for collaborative arrangements, but the recognition and measurement model for these transactions are not defined. Therefore, companies have accounted for these arrangements in varying ways. Once ASC 606 was released, the impact of the new standard to collaborative arrangements was unclear.

So what’s new?

ASU 2018-18 now clarifies that arrangements within the scope of ASC 808 may also be within the scope of the new revenue recognition standard. The determination is based on the unit-of-account, or performance obligation guidance under ASC 606. If there is a distinct good or service (or a bundle of goods or services) transferred to a customer, then there is an output of the company’s ordinary activities. In that case, the recognition, measurement, presentation and disclosure requirements in the revenue recognition standard should be applied to that unit of account!

For example, consider two drug companies, Tatum and Hill agree to produce and sell a new drug, HFC. Tatum is responsible for the commercialization activities, and Hill will be performing the research and development for the product. All the facts and circumstances would need to be evaluated for this collaborative arrangement. If Hill views their own research and development activities as a distinct service, and an output of their ordinary activities in exchange for consideration, they would consider Tatum a customer. The revenue and any profit-sharing payments would likely be within the scope of ASC 606. 

By now, you should know that, identifying performance obligations is not an easy task!

ASC 606 has given companies the opportunity to take a close look at their business contracts. When it comes to collaborative arrangements, there are companies that already identify the collaborative partner as a customer. This would not result in a significant change in practice. But companies with a combined unit of account must carefully evaluate their agreements to ensure the correct accounting policies are applied. 

Presentation and disclosure

It is important to note that the ASU does not allow companies to present all transactions with collaborative partners aggregately. The transactions in the scope of ASC 606 and outside the scope of ASC 606 must be separated. So all revenues within the scope of ASC 606, including the parts of the collaborative arrangement, are reported together.

ASU 2018-18 is effective for public companies for years beginning after December 15, 2019, and for years beginning after December 15, 2020 for all other companies, and early adoption is permitted as long as the company has already adopted the guidance is ASC 606. Companies must apply the ASU retrospectively to the date that ASC 606 was initially applied.

As always, contact us with any questions! In the meantime, make sure to check out our collection of eLearning courses on ASC Topic 606!

Disclaimer

This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.

New Revenue Standard

Comments (2)

  1. Matt:
    Nov 22, 2018 at 08:27 AM

    My company is in the process to acquire shares in a business and be a major shareholder from day 1 (30% to 50%), and together CEO/directorand Pym (director). Based on what I understand it could be argued that we would have joint control of this business. The agreement also mention a put and call option that are based on 4 years ebita. What will be the the main factors to consider in this transaction and whether to consider it a business combination from day 1?

  2. Mike Walworth, CPA:
    Nov 25, 2018 at 02:53 PM

    Matt,

    Assuming you are acquiring shares in a business (see new definition under ASU 2017-01), the key determination of whether or not it should be accounted for as a business combination is CONTROL (see ASC Topics 805 and 810). If you do not obtain control (i.e. acquiring 50% or less of the voting shares), then business combination accounting under ASC Topic 805 does not apply. Instead, you would account for it under the equity method of accounting (ASC Topic 323). That being said, check out the accounting for basis differences within that Topic (which is like a "back of an envelope" purchase accounting adjustments). I also would check out the put/call options as that sounds like it could be contingent consideration most likely accounted for as a liability.


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