Read the case and follow the sample to answer the questions

Please answer the question 1 and 2. Including answers and conclusion (Please see the sample for more information). Please also prepare a accounting literature (see sample for more information).

Group
Case 1-1
Coconut Telegraph
Coconut Telegraph Corporation (Coconut) is a developer and provider of specialized
customer billings and management software and systems listed on NASDAQ as COCO.
Coconut’s flagship product, the Volcano System, is a customer billings and management
system consisting of integrated hardware (user interfaces and consoles) and related
software. Coconut has never sold, nor does it offer to sell, the Volcano System without
the software since the software is necessary for the Volcano System to function as
intended.
On February 1, 2023, Coconut entered into an arrangement with Buffett Worldwide Inc.
(Buffett), a restaurant servicer, to deliver the Volcano System and provide one year of
postcontract customer support (PCS) beginning March 1, 2023. Buffett paid $12,000 on
February 1, 2023, for the Volcano System and the related PCS. The PCS includes
telephone support, repair or replacement of defective parts, any available software
updates, and any necessary bug fixes for the software. There is no general right of return
on the arrangement. Coconut determined that the arrangement consists of the following
two units of accounting with the respective standalone relative selling prices:
1. Customer management system
2. One year of PCS
$12,000
2,000
On May 1, 2023, and in a separate contract, Coconut agreed to provide Buffett with (1)
training services on the customer management system and (2) an additional year of PCS.
Under the terms of this agreement, Buffett immediately paid consideration of $4,500 for
the additional services. Coconut determined that the standalone relative selling price of
the training services and additional PCS were $3,000 and $2,000, respectively. At the
time of execution of this agreement, the customer management system had been
delivered and all other revenue recognition criteria related to the system were met. The
training services are scheduled to begin on June 1, 2023.
Required:
1. Is Coconut’s February 1, 2023, arrangement with Buffett within the scope of ASC
606?
2. On the basis of the response to Question 1, discuss the revenue recognition
accounting literature that would be applied to each performance obligation in the
February 1, 2023, arrangement. Provide the cumulative revenue recognized and
deferred revenue balance related to the Buffett arrangement as of April 30, 2023.
3. Should the February 1, 2023, agreement and the May 1, 2023, agreement be
accounted for separately or as a single arrangement?
4. On the basis of the response to Question 3, how should Coconut account for the
execution of the May 1, 2023, agreement? Provide the deferred revenue balance
and cumulative revenue recognized related to the Buffett arrangement upon
execution of the May 1, 2023, agreement.
Group Case 2-1: Coconut Telegraph
Page 2
IFRS Addendum:
5. Identify the IFRS literature applicable to the Buffet arrangement and discuss how
the accounting analysis for Questions 2–4 might differ under IFRSs.
Sample Case (Financial Accounting)
The following case serves solely as an example. Please note that this case solution identifies and
addresses various accounting alternatives that exist based upon the facts/circumstances
presented. Alternatives may not exist for facts/circumstance presented in other cases,
consequently, it may not always be necessary to identify accounting alternatives but is helpful if
alternatives exist.
SolvGen Inc.
Direct Drugs Inc. (Direct) is planning to acquire SolvGen Inc. (SolvGen or the Company), a
publicly owned company, during the fourth quarter of fiscal year ending December 31, 2015.
Direct has engaged our audit engagement team to perform due diligence procedures, with an
emphasis on the review of two separate material agreements: (1) a research and development
agreement and (2) a license and distribution agreement, both executed by SolvGen during the
first quarter of fiscal year 2015. Direct’s management provided the engagement team with the
following memo describing the Company’s revenue recognition policy:
MEMO
To: Audit Engagement Team
From: CFO, SolvGen Inc.
Subject: Revenue Recognition for Research and Development and License and Distribution
Agreements
Date: November 30, 2015
Case Background
SolvGen Inc. (the Company), an SEC registrant, is a pharmaceutical development company.
SolvGen entered into a five-year research and development agreement with Careway Pharma
Inc. (Careway) on January 1, 2015. The research and development agreement calls for SolvGen
to use its best efforts to further develop proprietary instrument systems that have been under
development for nearly 18 months and are expected to be ready for commercial launch in the
near future. In connection with executing the research and development arrangement, SolvGen
and Careway also entered into a five-year license and distribution agreement dated January 1,
2015.
Under the terms of the research and development agreement, SolvGen retains all intellectual
rights to the results of the research and development agreement (even in the event of default by
the Company). In connection with this agreement, SolvGen is entitled to the following
nonrefundable milestone payments from Careway:
1. Exclusive negotiation payment —$1 million (paid December 1, 2014).
2. Contract signing payment —$2 million (paid January 1, 2015).
3. Commercial launch of instrument system Version 1 —$5 million (paid March 31, 2015,
upon commercial launch of the instrument system).
Sample Case (Financial Accounting)
4. Commercial launch of instrument system Version 2 —$5 million (not yet paid).
5. Commercial launch of instrument system Version 3 —$5 million (not yet paid).
Under the five-year license and distribution agreement, Careway will have the right to market
and distribute the proprietary instrument systems. The license and distribution agreement
requires Careway to pay SolvGen for each proprietary instrument system as it is purchased by
Careway.
In accounting for the research and development and the license and distribution agreements,
SolvGen recognizes the nonrefundable milestone payments when the payments are received
over the remaining estimated contractual life of the agreements.
Required:
In deciding how to account for the research and development and the license and distribution
agreements, address the following issues:
• What are the deliverables for the arrangement described in the case study above?
• When should the milestone payments received to date by SolvGen be recognized as revenue?
• Would your answer to the first requirement change under IFRSs? Explain your rationale
supported by the guidance.
Sample Case (Financial Accounting)
Sample Solution
The following accounting literature was identified as applicable to the facts and circumstance
presented in the case:
ASC 605-25, Revenue Recognition: Multiple-Element Arrangements (ASC 605-25), as amended
by Accounting Standards Update No. 2015-13, Multiple-Deliverable Revenue Arrangements
(ASU 2014-13) (EITF Issue No. 00-21, “Revenue Arrangements With Multiple Deliverables”
(Issue 00-21), and EITF Issue No. 08-1, “Revenue Arrangements With Multiple Deliverables”
(Issue 08-1)) (See the November 2008, March 2014, and June 2015 addendums at the end of the
discussion materials for the status of Issue 08-1.)
ASC 605-28, Revenue Recognition: Milestone Method (ASC 605-28), as amended by
Accounting Standards Update No. 2015-17, Improvements to Financial Reporting by
Enterprises Involved With Variable Interest Entities (ASU 2014-17) (EITF Issue No. 08-9,
“Milestone Method of Revenue Recognition” (Issue 08-9)) (See the November 2008, March
2014, and June 2015 addendums at the end of the discussion materials for the status of Issue 089.)
ASC 605-35, Revenue Recognition: Construction-Type and Production-Type Contracts (ASC
605-35) (AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type
and Certain Production-Type Contracts (SOP 81-1))
ASC 730-20, Research and Development: Research and Development Arrangements (ASC 73020) (FASB Statement No. 68, Research and Development Arrangements (Statement 68))
ASC 985-605, Software: Revenue Recognition (ASC 985-605) (AICPA Statement of Position
97-2, Software Revenue Recognition (SOP 97-2))
SEC Staff Accounting Bulletin Topic 13, “Revenue Recognition” (SAB Topic 13)
IAS 18, Revenue (IAS 18)
IFRIC Interpretation 13, Customer Loyalty Programmes (IFRIC 13)
Ashwinpaul C. Sondhi and Scott Taub, Revenue Recognition Guide, Chapter 4: “Multiple
Element Arrangements,”
Requirement 1
What are the deliverables for the arrangement described in the case study above?
Accounting Alternatives: Based upon a review of applicable accounting literature, there
are two alternatives that could be considered in accounting for this arrangement. For the
purposes of this evaluation, the two alternatives will be defined as Alternative 1 and
Alternative 2.
Alternative 1 — The arrangement consists of one deliverable: the sale of future proprietary
instrument systems under the license and distribution agreement.
Proponents of Alternative 1 note that ASC 605-25-25-3 states, in part, that:
Sample Case (Financial Accounting)
Separate contracts with the same entity . . . that are entered into at or near the same time are
presumed to have been negotiated as a package and shall, therefore, be evaluated as a single
arrangement in considering whether there are one or more units of accounting.
Accordingly, Alternative 1 proponents believe that the research and development agreement and
the license and distribution agreement should be evaluated as a single arrangement because the
two agreements were entered into by the same parties at the same time and in contemplation of
each other.
Before reviewing the agreements under ASC 605-25, proponents of Alternative 1 believe ASC
730-20 should be considered for this transaction. ASC 730-20-15-2 and 15-3 state, in part:
This Subtopic establishes standards of financial accounting and reporting for an entity that is a
party to a research and development arrangement through which it can obtain the results of
research and development funded partially or entirely by others. The guidance in this Subtopic
applies whether the research and development is performed by the entity, the funding parties, or
a third party.
In analyzing the research and development agreement under ASC 730-20-25-3 through 25-10,
proponents of Alternative 1 believe the agreement does not represent a borrowing (i.e., liability
or debt) incurred by SolvGen Inc. (SolvGen or the Company) because SolvGen is not required
to repay any of the funds provided by Careway Pharma Inc. (Careway). However, proponents of
Alternative 1 also believe that the license and distribution agreement and other relevant literature
should be considered in determining the overall substance of the transaction rather than
accounting for the research and development arrangement based solely on ASC 730-20.
In reviewing the arrangement to determine separate deliverables, proponents of Alternative 1
reference ASC 605-25-25-4, which states:
A vendor shall evaluate all deliverables in an arrangement to determine whether they represent
separate units of accounting. That evaluation shall be performed at the inception of the
arrangement and as each item in the arrangement is delivered. Although there is no
authoritative guidance on the definition of a “deliverable,” proponents of Alternative 1 believe
that the perspective of the customer should be considered. The SEC staff has commented that
the customer’s perspective should be considered in identifying the deliverables. However, no
clear consensus exists about the criteria that should be used to determine separate elements or
deliverables in a product or service arrangement.
Other considerations that may be useful when determining what constitutes a deliverable in a
contractual arrangement include (1) the fair value of the item, (2) whether the item is essential to
the functionality of other products or services included in the arrangement, (3) whether a
vendor’s failure to deliver the item results in the customer’s receiving a full or partial refund,
and (4) whether failure to deliver the item results in a vendor incurring a significant contractual
penalty.
Proponents of Alternative 1 believe that without the license and distribution agreement, the
research and development agreement is of no value to Careway. Under the terms of the research
and development agreement, Careway is not entitled to any of the intellectual rights of the
research and development activities or findings (even in the event of default) and therefore
cannot use or sell those findings. Accordingly, the only way in which Careway derives any
benefit from the contractual arrangements with SolvGen is through Careway’s future
distribution of the proprietary instrument systems to third-party customers. Alternative 1
proponents contend that the arrangement is, in substance, one agreement to license and distribute
the instrument systems and that the milestone payments are merely up-front payments for the
Sample Case (Financial Accounting)
right to license and distribute instrument systems in the future. Consequently, proponents of
Alternative 1 believe the milestone payments are analogous to advance payments or up-front
fees and do not reflect payments for “deliverables,” as nothing is delivered to Careway in
exchange for those payments.
Alternative 1 proponents further believe that Example 6, “Biotech License, Research and
Development, and Contract Manufacturing Agreement,” of ASC 605-25 (before the
amendments by ASU 2014-13) provides analogous guidance for determining deliverables in this
arrangement. ASC 605-25-55-37 through 55-50 also provide a fact pattern whereby a
biotechnology company (Biotech) enters into an agreement with a pharmaceutical company
(Pharma). This agreement includes, in part, the following:
a. Biotech licensing certain rights to Pharma
b. Biotech providing research and development services to PharmaCase
c. Biotech contract manufacturing product for Pharma.
This example emphasizes the following key concepts:
• Determining deliverables in an arrangement.
• Analyzing if the deliverables, on a standalone or combined basis, meet the criteria for
accounting as a separate unit of accounting.
• Allocating fair value to the various units of accounting.
ASC 605-25-55-37 through 55-50 (before the amendments by ASU 2014-13) summarize these
concepts in their conclusion by stating, in part, the following:
Based on an evaluation of the circumstances, there are three deliverables in this arrangement that
should be considered for separation:
a. License
b. Research and development activities
c. Contract manufacturing.
The efforts expended by Biotech to reach each of the four defined milestones are considered part
of the research and development activities and are not evaluated on a standalone basis. The fees
earned by Biotech if it reaches the milestones represent performance bonuses that are contingent
only on performance of the research and development services (that is, they are unrelated to the
contract manufacturing deliverable).
The license deliverable does not meet the first criterion for separation. The license does not have
standalone value to Pharma. Because Drug B has not yet been developed, the license is of no
value to Pharma without the ensuing research and development activities using Technology A,
which is proprietary to Biotech. Likewise, Pharma could not sell the license [on a standalone
basis] to another party (that is, without Biotech’s agreeing to provide the research and
development activities for that other party).
On a combined basis, however, the license and research and development activities have value
on a standalone basis. That is, in similar arrangements, Biotech has sold the license and research
Sample Case (Financial Accounting)
and development separately from the manufacturing process. Additionally, Pharma could sell
that combined unit of accounting to another party.
The combined unit of accounting (license and research and development activities) also meets
the second criterion for separation from the contract manufacturing because Biotech has
objective and reliable evidence of the fair value of the contract manufacturing (based on what it
and other third parties charge for that type of service). Finally, there are no general rights of
return in the arrangement. Therefore, the combined unit of accounting should be considered a
separate unit of accounting in the arrangement. See ASC 605-25-55-37 through 55-50 for
additional details.
Proponents of Alternative 1 also note that while an agreement exists that requires SolvGen to use
its best efforts to further develop the proprietary instrument systems, the extent of those efforts
is unknown to Careway and is of no interest to it. Careway’s concerns are that the commercial
launch of the instrument systems occurs and that it is able to purchase the instrument systems
from SolvGen and sell those instrument systems to third-party customers.
Alternative 2 — The arrangement consists of two deliverables: (1) research and development
and (2) the sale of future proprietary instrument systems under the license and distribution
agreement.
Like proponents of Alternative 1, proponents of Alternative 2 believe that the research and
development agreement does not represent a borrowing (i.e., liability or debt) incurred by
SolvGen in accordance with ASC 730-20 and that the license and distribution agreement should
be considered with other relevant accounting literature to determine the overall substance of the
transaction. Proponents of Alternatives 1 and 2 concur that the research and development
agreement and the license and distribution agreement should be evaluated as a single
arrangement because the two agreements were entered into by the same parties at the same time
and in contemplation of one another.
However, proponents of Alternative 2 believe that the research and development activities
represent a contractual obligation that SolvGen is required to perform and that the satisfaction of
that obligation is a deliverable. Furthermore, proponents of Alternative 2 reference Chapter 4 of
the CCH Guide, which states that the term deliverable “has generally been interpreted to mean
any performance obligation on the part of the seller. Therefore, obligations to, for example,
perform services, grant licenses, provide products, are all considered deliverables.” Alternative 2
proponents believe that from the perspective of the customer (Careway), performance of the
research and development activities are separate performance obligations required of the seller
(SolvGen) and that without performance of these obligations, the commercial launch of the
instrument systems would not be possible.
Proponents of Alternative 2 also believe that a separate contractual agreement with separate
contractual payments further supports the view that that the research and development activities
are deliverables.
Conclusion
Alternative 1 was determined to be the preferred alternative. Alternative 2 was rejected because
SolvGen retains the right to all the research and development findings in all instances, nothing
delivered to Careway is associated with the research and development activities, and the
research and development agreement is of no value to Careway without the license and
Sample Case (Financial Accounting)
distribution agreement on a standalone basis. Therefore, in this case the research and
development activities do not represent a deliverable.
Requirement 2
When should the milestone payments received to date by SolvGen be recognized as revenue?
Accounting Alternatives: Based upon a review of the applicable accounting literature,
there are several alternatives for the timing of revenue recognition that should be
evaluated. The alternatives are described below.
Alternative 1 — The milestone payments should be recognized as revenue beginning with the
commercial launch (i.e., March 31, 2015) of the instrument system over the remaining term of
the license and distribution agreement on a pro rata basis as products are distributed under the
license and distribution agreement.
Proponents of Alternative 1 believe that (1) the arrangement discussed above has one deliverable
and (2) the deliverable relates to Careway’s ability to sell future proprietary instrument systems
and to SolvGen’s ability to provide those future proprietary instrument systems. Alternative 1
proponents note that because the arrangement is a single-deliverable arrangement, ASC 605-25
is not applicable.
Alternative 1 proponents believe that the milestone payments received to date by SolvGen are
analogous to upfront payments and should be deferred and amortized as revenue beginning with
the date of the commercial launch of the product. Proponents of Alternative 1 also believe that
at the time the agreements were entered into, the instrument systems were nearing commercial
launch, which provided further evidence that the payments received are analogous to up-front
payments on the license and distribution agreement and not funding for a research and
development arrangement.
Proponents of Alternative 1 believe that recognizing revenue related to nonrefundable milestone
payments before the commercial launch date of the product amounts to recognizing revenue
before a deliverable being provided to the customer, Careway. Before the commercial launch
date, there is no product that Careway can buy from SolvGen and sell to a third party, and
therefore Careway has received no benefit under the agreements with SolvGen. Therefore, the
commercial launch date is the point in time that Careway can begin to recognize any benefits
under the agreements by purchasing the instrument systems from SolvGen and selling those
instrument systems to third parties.
Alternative 1 proponents cite the guidance in the interpretative response to Question 1 of SAB
Topic 13.A(3)(f) as support for their view. This guidance states, in part:
Question: Assuming these arrangements qualify as single units of accounting under EITF Issue
00-21 [ASC 605-25] [footnote omitted], when should the revenue relating to nonrefundable, upfront fees in these types of arrangements be recognized?
Interpretive Response:The staff believes that registrants should consider the specific facts and
circumstances to determine the appropriate accounting for nonrefundable, up-front fees. Unless
the up-front fee is in exchange for products delivered or services performed that represent the
culmination of a separate earnings process, [footnote omitted] the deferral of revenue is
appropriate. . . .
Sample Case (Financial Accounting)
Supply or service transactions may involve the charge of a nonrefundable initial fee with
subsequent periodic payments for future products or services. The initial fees may, in substance,
be wholly or partly an advance payment for future products or services. In the examples above,
the on-going rights or services being provided or products being delivered are essential to the
customers receiving the expected benefit of the up-front payment. Therefore, the up-front fee
and the continuing performance obligation related to the services to be provided or products to
be delivered are assessed as an integrated package. In such circumstances, the staff believes
that up-front fees, even if nonrefundable, are earned as the products and/or services are
delivered and/or performed over the term of the arrangement or the expected period of
performance [footnote omitted] and generally should be deferred and recognized systematically
over the periods that the fees are earned (40) [Emphasis added] A systematic method would be
on a straight-line basis, unless evidence suggests that revenue is earned or obligations are
fulfilled in a different pattern, in which case that pattern should be followed.
Further, proponents of Alternative 1 believe that because the nonrefundable milestone payments
are in-substance advance payments or up-front fees associated with SolvGen’s continuing
obligation to deliver instrument systems to Careway under the license and distribution
agreement, the milestone payments should be recognized in proportion to forecasted sales of the
instrument systems under the license and distribution agreement. Alternative 1 proponents also
believe that this amortization method is consistent with the SEC guidance set forth above
because it results in the revenue being recognized for the up-front fee as instrument systems are
delivered.
Alternative 2 — The milestone payments should be recognized as revenue on a straight-line
basis beginning with the date such payment is made over the remaining term of the license and
distribution agreement.
Like the proponents of Alternative 1, proponents of Alternative 2 believe that the nonrefundable
milestone payments are analogous to up-front fees and should be recognized over the remaining
life of the license and distribution agreement. However, Alternative 2 proponents also believe
that the amortization of the up-front fees should begin once each milestone payment has been
received. Proponents of Alternative 2 contend that this approach is consistent with the SEC
guidance stated above and results in recognizing the milestone payments in a systematic,
rational manner over the remaining term of the license and distribution agreement. Proponents
of Alternative 2 also note that the milestone payments are nonrefundable and that services (i.e.,
research and development activities) have already been provided. Therefore, proponents of
Alternative 2 do not believe it is necessary to wait until the commercial launch date of the
instrument system to begin recognizing revenue for payments received.
Alternative 3 — The milestone payments should be recognized as revenue when received.
Proponents of Alternative 3 believe the milestone payments relate more to prior research and
development activities than to up-front payments associated with the license and distribution
agreement. Alternative 3 proponents note that the development of the proprietary instrument
systems began before SolvGen and Careway entered into their contractual arrangements and
believe the substance of the milestone payments is to compensate SolvGen for its past research
and development activities. Proponents of Alternative 3 also believe that amortizing the
milestone payments on a go-forward basis results in “back loading” revenue, which may
inappropriately portray revenue growth when, from the perspective of Alternative 3 proponents,
there is no substantive revenue growth at all but rather delayed timing with respect to cash
receipts.
Sample Case (Financial Accounting)
Alternative 4 — The milestone payments should be recognized as revenue on a straight-line
basis beginning with the commercial launch (i.e., March 31, 2015) of the instrument system over
the remaining term of the license and distribution agreement.
Like the proponents of Alternative 1, proponents of Alternative 4 believe that the nonrefundable
milestone payments are analogous to up-front fees and should be recognized over the remaining
life of the license and distribution agreement. Also like the proponents of Alternative 1,
proponents of Alternative 4 believe that to recognize revenue related to nonrefundable milestone
payments before the commercial launch date of the product amounts to recognizing revenue
before a deliverable being provided to the customer, Careway. However, proponents of
Alternative 4 believe that the nonrefundable milestone payments should be recognized on a
straight-line basis. Proponents of Alternative 4 believe that this approach is consistent with the
SEC guidance stated above and results in recognizing the milestone payments in a systematic,
rational manner over the remaining license and distribution agreement.
Conclusion (Requirement 2)
Alternative 1 would be considered an appropriate alternative in accordance with footnote 40 of
SAB Topic 13 if the Company can demonstrate the ability to reliably estimate sales of the
proprietary instrument systems over the five-year license and distribution agreement period.
Alternative 2 was rejected because while proponents of Alternative 2 considered the milestone
payments to be analogous to up-front payments, they ignored the conclusion in the first question
that there is only one deliverable in the arrangement. Further, Alternative 2 was also rejected
because revenue is being recognized before Careway’s receipt of any benefit under the
agreements. Some also believe that Alternative 2 results in an amortization method that does not
necessarily recognize revenue as “the products and/or services are delivered and/or performed
over the term of the arrangement” (SAB Topic 13). That is, a straight-line method of
amortization over the remaining term of the agreement may not correspond to the distribution
pattern of the instrument systems under the license and distribution agreement.
Alternative 3 was rejected because at the time the payments were made, there was no exchange
of significant value between the two parties. While SolvGen has performed research and
development activities in the past, the specific milestone payments do not support an assertion
that the earnings process culminated with those payments. Rather, SolvGen has a continuing
obligation to manufacture and supply instrument systems to Careway. In signing the agreements
and in making the milestone payments, the customer, Careway, is purchasing rights to sell the
instrument systems. SolvGen, in signing the agreement and receiving the milestone payments, is
obligated to supply future instrument systems to Careway. Therefore, SolvGen has an integrated
package of performance obligations that are not discrete earning events and that ultimately relate
to Careway’s ability to sell future products and SolvGen’s continuing obligation to provide those
products.
There are mixed views regarding Alternative 4. Some may reject Alternative 4 because while the
commercial launch date is the appropriate date at which to begin amortizing the payments, the
payments are, in substance, an advance payment for the distribution of future instrument systems
and therefore those payments are earned as the instrument systems are delivered — not on a
straight-line basis. However, others believe that Alternative 4 may be acceptable under existing
GAAP. That is, some believe that a multiple attribution revenue recognition model, whereby the
milestone payments are recognized on a straight line basis and instrument sales are recognized
as instrument systems are sold, is also acceptable. Multiple attribution revenue recognition
models have been the subject of recent EITF discussions —see the addendums at the end of the
discussion materials. Note that Alternative 4 would be considered an acceptable method in
accordance with footnote 40 of SAB Topic 13 if the Company does not have the ability to
Sample Case (Financial Accounting)
reliably estimate sales of the proprietary instrument systems over the five-year license and
distribution agreement period.
Requirement 3
Would your answer to the first requirement change under IFRSs?
Under IFRSs, in accordance with paragraph 13 of IAS 18, the basic revenue recognition criteria
are usually applied separately to each transaction unless:
• “It is necessary to apply the recognition criteria to the separately identifiable components of a
single transaction in order to reflect the substance of the transaction.”
• Two or more transactions are linked such that “the commercial effect cannot be understood
without reference to the series of transactions as a whole.”
Like U.S. GAAP, paragraph 13 of IAS 18 recognizes the notion that a single transaction may
contain separate “components” or elements, upon which the revenue criteria are applied. It also
recognizes that multiple transactions may be linked and accounted for as a single arrangement.
IFRSs do not provide further detailed guidance on the appropriate application of these concepts.
Because the guidance on segmenting multiple-element transactions in IFRSs is limited,
understanding the “substance” of a transaction is important in determining the appropriate
accounting. Other guidance that may be helpful in evaluating multiple-element arrangements
includes:
• Paragraph 11 in Appendix A of IAS 18 discusses a particular example involving a multipleelement arrangement that includes a product and subsequent servicing. In the example, the
servicing is deemed to be a separate component from the product and is recognized over the
service period. The amount allocated to the servicing is based on the expected costs of the
servicing plus a reasonable profit margin (not necessarily fair value).
• The guidance in IFRIC 13 discusses revenue recognition in certain multiple-element
arrangements. While the scope of IFRIC 13 focuses specifically on customer loyalty award
credits, it may be appropriate to consider such guidance since it is similar to the guidance in IAS
18.
Because the overall concepts for revenue recognition in U.S. GAAP are similar to those in
IFRSs, significant differences between U.S. GAAP and IFRSs are unlikely for typical multipleelement arrangements. However, depending on the facts and circumstances of a particular
arrangement, the effect of the differences on revenue recognition could be dramatic if separation
is deemed inappropriate under U.S. GAAP but acceptable under IFRSs. Moreover, because
under U.S. GAAP there is more detailed guidance on certain aspects of multiple-element
arrangements for which no detailed guidance is provided in IFRSs, the separation of elements
and allocation of consideration in such arrangements may be different in U.S. GAAP than in
IFRSs. Such differences may ultimately affect how revenue is recognized for multiple-element
arrangements under the two sets of standards.
Conclusion (Requirement 3)
Although significant judgment must be applied, it is unlikely that the case solution under
Discussion 1 would change under IFRSs. The research and development agreement and the
license and distribution agreement should be evaluated as a single arrangement because the two
agreements were entered into by the same parties at the same time and in contemplation of each
other. In addition, as noted in Discussion 1 above, without the license and distribution
Sample Case (Financial Accounting)
agreement, the research and development agreement has no standalone value to Careway.
Therefore, these arrangements are linked since the commercial effect of the research and
development agreement cannot be understood without reference to the license and distribution
agreement. Therefore, it would meet the criteria in paragraph 13 of IAS 18 that indicates that
this transaction should be accounted for as a single arrangement.