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Difference Between Revenue, Collaborative Arrangements Is Clarified With Amendment to U.S. GAAP

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

The FASB published an update to U.S. GAAP to address financial reporting questions about some types of joint ventures. The update clarifies how to assess whether certain transactions between collaborative arrangement participants should be accounted for as revenue and follow the revenue recognition standard.

Companies that team up to share research or technology to develop new products received updated accounting guidance from the FASB on November 5, 2018.

The board published Accounting Standards Update (ASU) No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, to clear up when collaborative arrangements between businesses result in revenue as opposed to payments between partners. The clarification of U.S. GAAP is expected to affect the pharmaceutical and biotechnology industries, where collaborative arrangements are commonly used to develop new drugs.

The FASB took a narrow approach to the problem that companies said they faced from FASB ASC 606, Revenue From Contracts With Customers. The standard, which public companies started following this year and which private companies must follow in 2019, applies to contracts with customers. Businesses and accountants wanted clarity on when certain collaborative arrangements could be considered customer arrangements.

With ASU No. 2018-18, the FASB said that when a collaborative participant is a customer, the contract may need to be accounted for according to FASB ASC 606, including the recognition, measurement, presentation, and disclosure requirements.

The amendments in ASU No. 2018-18 let organizations present units of account in collaborative arrangements that are within the scope of the revenue recognition standard, together with revenue accounted for under the revenue standard. The parts of the collaborative arrangement that are not in the scope of the revenue recognition standard should be presented separately, the FASB said.

The FASB did not address the accounting for transactions with a collaborative arrangement participant that are directly related to third-party sales of either participant in the arrangement. The FASB also did not address the accounting for nonrevenue transactions between the participants.

While the FASB said it considered many questions that could have expanded the project’s scope, the board decided to keep the project narrow, in part to issue guidance “on a timely basis” because of the new requirements in the revenue standard.

The update is based on a proposal the FASB released in April via Proposed ASU No. 2018-240, Collaborative Arrangements (Topic 808): Targeted Improvements. Comment letters from accounting firms, companies, and professional groups told the FASB that the proposal would clear up one question, but it would not solve broader problems about the accounting for collaborative arrangements. 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.

According to the amendments in ASU No. 2018-18, nonrevenue transactions have to be evaluated to determine whether they are covered by other accounting literature and, if not, a reasonable and consistently applied accounting policy has to be developed for them.

The FASB acknowledged that questions will likely continue as a result of the update, but the board was not prepared to take on a larger project about the collaborative arrangements standard.

The amendments in ASU No. 2018-18 are effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Private companies and other organizations have until fiscal years beginning after December 15, 2020, to apply the guidance and are scheduled to apply the guidance for interim periods within fiscal years beginning after December 15, 2021, the FASB said. Early adoption is permitted.

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