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Revenue Recognition 2010

Revenue Recognition 2010

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Published by Cindy Zhang

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Published by: Cindy Zhang on May 26, 2012
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03/07/2014

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As noted, ASC 980-605 provides the basis for the accounting in the performance-based
models. Under the model in ASC 980-605, revenue is recognized based on the lesser of (1)
the amount calculated using the proportional performance to date and (2) the amount due

under the terms of the contract for work that has already been performed. For example,

if an entity has provided 50 percent of the service but only 45 percent of the total fee has
become due, revenue recognition would be limited to 45 percent.
The frst performance-based model uses total expected revenue. The second model
uses only the up-front payments plus payments for service performed and milestones

already achieved in determining the amount of service that has been provided under the

ASC 980-605 model. Both methods limit the amount that can be recognized as revenue

to the nonrefundable amounts that are due under the terms of the contract.
An entity should apply the following steps to calculate the amount of revenue to
be recognized in a period:

• Estimate the percentage of services that have already been performed in relation

to the total services to be provided.

• Multiply the percentage above by either the total amount of expected payments

(expected revenue method) or the nonrefundable payments to date, including
amounts contractually due but not yet received (actual revenue method), depending
on which method the entity elects to use.

• Compare the amount calculated in the bullet above to the total nonrefundable payments

received to date (including amounts contractually due, but not yet received), and
recognize cumulative revenue for the lesser amount.

178 Grant Thornton LLP

The following examples illustrate these concepts.

Performance-based model: expected revenue

In addition to the facts outlined in the preceding example for the milestone-based model, Biotech estimates it
will require three years to complete the R&D activities through to FDA approval and it estimates the related total
R&D costs at $8 million. As of December 31, 20X0, Biotech has incurred costs of $1,600,000.

Nonrefundable payments received as of December 31, 20X0 are as follows:

Up-front payment

$10,000,000

Milestone #1

5,000,000

FTE payments

300,000

$15,300,000

The following represents revenue recognized by Biotech in fscal 20X0 using the expected revenue method:

Costs incurred to date

$ 1,600,000

Total costs expected to be incurred

8,000,000

Percent complete at year-end

20%

Total expected revenue

29,900,000

Amount recognized using expected revenue method

$ 5,980,000

Performance based model: actual revenue

In addition to the facts in the example above for the milestone-based model, Biotech estimates it will require
three years to complete the R&D activities through to FDA approval and it estimates the related total R&D
costs at $8 million. As of December 31, 20X0, Biotech has incurred costs of $1,600,000.

Nonrefundable payments received as of December 31, 20X0 are as follows:

Up-front payment

$10,000,000

Milestone #1

3,000,000

FTE payments

300,000

$13,300,000

The following represents revenue recognized by Biotech in fscal 20X0 using the actual revenue method:

Costs incurred to date

$ 1,600,000

Total costs expected to be incurred

8,000,000

Percent complete at year-end

20%

Amounts received to date

13,300,000

Amount recognized using actual revenue method

$ 2,660,000

What is the proper accounting for research and development arrangements? 179

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