The FASB agreed to finalize a plan aimed to address questions in practice about when companies team up to share costs. The forthcoming update to U.S. GAAP, attempts to clarify when transactions in collaborative arrangements should be accounted for as revenue.
Companies that share research or technology for developing new products can expect to receive some new accounting guidance.
The FASB on July 26, 2018, unanimously agreed to finalize an update to U.S. GAAP to clear up when collaborative arrangements result in revenue as opposed to payments between partners. The clarification is expected to affect companies in the pharmaceutical and biotechnology sectors, which frequently set up joint ventures to share the costs for developing new drugs.
The board plans to publish the update by the end of the year, a FASB spokesperson said.
The FASB’s new guidance is purposely narrow. The board intends to help businesses determine when to follow the revenue guidance in FASB ASC 606, Revenue From Contracts With Customers. Businesses and accountants wanted clarity on when certain collaborative arrangements could be considered customer agreements.
“The core thing we were trying to answer was, if you’re in revenue, follow 606,” FASB Vice Chairman James Kroeker said. “If you’re not in 606, don’t call it 606.”
The forthcoming update is based on Proposed Accounting Standards Update (ASU) No. 2018-240, Collaborative Arrangements (Topic 808): Targeted Improvements, which says that certain transactions between the partners in a joint venture should be accounted for as revenue. The arrangements generate revenue when a participant is deemed to be a customer. In these situations, the guidance in FASB ASC 606 should be applied, including the recognition, measurement, presentation, and disclosure requirements, the FASB said.
Many audit firms, companies, and professional groups told the FASB in comment letters that Proposed ASU No. 2018-240 cleared up one question but would not solve some broader problems. FASB ASC 808, Collaborative Arrangements, does not provide comprehensive recognition or measurement guidance, and the accounting for the arrangements is often based on an analogy to other accounting literature or an accounting policy election.
The FASB agreed that nonrevenue transactions will have to be evaluated to determine whether they fall within the scope of other accounting literature and, if not, develop a reasonable and consistently applied accounting policy.
The FASB acknowledged that questions will likely continue after the amendment to FASB ASC 808 is published, but the board was not prepared to take on a larger project.
“I certainly appreciate that there’s a lot of valid questions that are going to continue, that exist now, and are going to continue after we do this narrow-scope improvement to the guidance,” FASB member Christine Botosan said. “We decided that we weren’t prepared to do this at this time, not because there aren’t issues out there — there are — but we’ve got other fish we want to fry at the moment.”
FASB member Gary Buesser, who joined the board on July 1, also said that analysts and investors were not pleading with the FASB to do more work on collaborative arrangements. He described the financial statement disclosures about collaborative arrangements as “some of the best disclosures in U.S. GAAP.”
He also highlighted a comment letter from KPMG LLP, which noted that public companies started applying the new revenue standard’s requirements in 2018. The audit firm wrote that the FASB could wait to see how financial reporting practices evolve under the new standard.
“So how do you basically jump in with a broad project when you’re not even sure what’s going to happen going forward, given the limited amount of time we’ve been doing this?” Buesser said.
The FASB said the amended guidance will be effective for public companies for fiscal years that start after December 15, 2019, and the interim periods that are in those fiscal years. Private companies would get an additional year to comply, the FASB said.
The FASB said businesses and organizations can adopt the amended guidance ahead of the effective date if they are using FASB ASC 606. Public companies started using the revenue standard in 2018, and private companies are scheduled to begin applying it in 2019.