Revenue Recognition Multiple-Element Arrangements
ASC 605-25
Highlights
Overview
• This topic addresses accounting by a vendor for
arrangements under which there are multiple revenuegenerating activities, including
– how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting and
– how arrangement consideration should be measured and
allocated to the separate units of accounting.
• Examples:
– May be multiple products, services, or rights
– May involve performance at different times or different periods
of time.
– May include initial installation, initiation, or activation services
in the form of a fixed fee or a fixed fee coupled with a
continuing payment stream.
– Fees for continuing performance may be fixed, variable based
on future performance, or a combination.
Scope
• Applies to all entities
• Applies to
– all deliverables
• products, services, or rights to use assets
– within contractually binding arrangements
• written, oral or implied
– in all industries
– under which a vendor will perform multiple
revenue-generating activities.
Does NOT apply to:
• Arrangements that include vendor offers to a customer
for
– Free or discounted products or services delivered at a
future date OR rebate or refund
• if the customer completes a specified cumulative level of revenue
transactions or remains a customer for a specified length of time.
• Arrangements involving award credits by loyalty
program operators
• Payments relating to R&D deliverables that are
accounted for under the milestone method of revenue
recognition (605-28)
Interaction with other topics
• If another topic addresses both separate units of
accounting and allocation of consideration,
– apply that topic.
• If another topic addresses separate units of
accounting but not allocation of consideration,
– allocate consideration per the relative selling price of
the deliverables.
• If another topic addresses neither separate unit
of accounting or allocation of consideration,
– follow this subtopic.
• This subtopic does not address when the
criteria for revenue recognition are met
• or provide the appropriate revenue
recognition convention for a unit of
accounting.
Recognition
• Again, this subtopic provides guidance for determining:
– units of accounting within a multiple deliverable arrangement
and
– measurement and allocation of consideration among the
separate units of accounting.
• Revenue arrangement with multiple deliverables shall be
divided into separate units of accounting if certain criteria
are met,
• and arrangement consideration shall be allocated among
the separate units of accounting based on relative selling
prices.
• Applicable revenue recognition criteria is considered
separately for separate units of accounting.
• Units of accounting:
– Separate contracts with the same entity or related
parties that are entered into at or near the same
time are presumed to have been negotiated as a
package and are considered a single arrangement
in determining the units of accounting
– Evaluation of units of accounting is done at the
inception of the arrangement
• Delivered item(s) are considered a separate unit
of accounting if both of the following criteria are
met:
– Delivered item has value to the customer on a
standalone basis:
• if they are sold separately by any vendor
• or if the customer could resell the delivered items on a
standalone basis
– Does not require the existence of an observable market
– If the arrangement includes a right of return for the
delivered item, delivery or performance of the
undelivered item is considered probable and
substantially in the control of the vendor.
Initial Measurement
• Consideration is allocated at the inception of
the arrangement to all deliverables on the
basis of their relative selling price,
– unless required under another topic to be
recorded at fair value and marked to market each
reporting period thereafter.
• Selling price is determined using:
– vendor-specific objective evidence of selling price if
possible (preferred)
• limited to either the price charged for a deliverable when it
is sold separately or if not sold separately, the prics
established by management having relevant authority
– or third party evidence of selling price
• Price for interchangeable products or services in standalone
sales to similarly situated customers
– or worst case – use the best estimate of selling price.
• Consider market conditions as well as entity-specific factors
• The amount allocable to a delivered item is limited to
the amount that is not contingent upon delivery of
additional items or meeting other performance
conditions.
• The revenue per period is limited to the measurement
assuming cancellation will not occur.
– An asset for the excess of revenue recognized over the
amount of cash received shall not exceed all amounts to
which the vendor is legally entitled, including cancellation
fees.
• Consider whether the vendor intends to enforce cancellation fees
in determining the amount of any asset.
• Contractually stated prices for individual
products or services in a multiple deliverable
arrangement shall not be presumed to be
representative of vendor-specific objective
evidence, third-party evidence or a vendor’s
best estimate of selling price.