January 2015
TECHNOLOGY AND LIFE SCIENCES
REVENUE RECOGNITION:
MULTIPLE DELIVERABLE
ARRANGEMENTS
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Scott Rodie
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Sciences Leader
514 931 5796
srodie@bdo.ca
Revenue recognition is an increasingly important topic for private companies operating in the
Technology and Life Sciences sector. Revenue recognition policies are scrutinized by investors,
potential acquirers and regulators alike.
As businesses move into a phase of rapid growth, they commonly enter into increasingly complex
sales arrangements and different revenue streams. Revenue recognition accounting is consistently
one of the key accounting risk areas for companies in this sector. Whether reporting under accounting
standards for private enterprise (ASPE), international financial reporting standards (IFRS,) or even U.S.
standards, understanding the risks when dealing with multiple deliverable arrangements and considering
all relevant factors is critical for financial executives working in the T&LS sectors.
There are three topic areas that are of most concern for organizations when dealing with multiple
deliverable arrangements when reporting under ASPE.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part
of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.
Armand Capisciolto
Partner, National Accounting Standards
416 369 6937
acapisciolto@bdo.ca
www.bdo.ca/technology
BDO | Revenue Recognition
How do I determine whether the revenue recognition criteria are applied to the deliverables as a single unit of account or multiple units of account?
Factors to consider:
•
Are the transactions entered into at or near the same time?
•
•
Do the individual components have value to the customer on
a stand-alone basis?
Is the pricing of the individual components reasonable or is the total
price for all the components together more supportable?
•
Is there an upfront fee that is not linked to any deliverable?
Is the occurrence of one transaction dependent on the
occurrence of the other transaction?
•
What are the remaining performance obligations of the entity?
•
Has delivery occurred or services been rendered?
•
Do other vendors sell both components together?
•
Are there requirements to repurchase the product?
•
Does the entity routinely sell the components together or separately?
•
Is there another vendor that can sell the undelivered component to the
entity and be compatible with the delivered component?
•
Examples
Key factors
ABC Company sells a complete business solution, which consists of the
following deliverables: equipment X and Y and software Z. ABC does not
sell X, Y, and Z separately; however, other companies do sell the three
deliverables separately.
•
Deliverables equipment X and software Z can only be used with
equipment Y. This factor could be an indication of one unit of account.
•
Other companies sell X, Y, Z separately. This factor could be an
indication of three units of account.
ABC Company delivered equipment X and software Z on March 1st, but did
not deliver equipment Y until April 1st. Without equipment Y, the customer
cannot use X and Z. The contract provides that if all pieces of equipment
are not delivered, the customer may return equipment X and software Z
and have no liability to ABC.
•
X and Z are returnable. This factor could be an indication of one unit of
account.
Talk Time Inc. is a telecommunications company serving residential and
commercial customers.
•
The equipment has no stand alone value without the data plan.
This could be an indication of one unit of account.
Recently, the Company signed a contract with a customer to provide
teleconferencing equipment and data services. The price of the
teleconferencing equipment is $5m and the price of the data services is
$2.5m. The data services are necessary for the teleconferencing equipment
to work. The data plan is for 5 years. The risks and rewards of the equipment
will be transferred to the customer immediately. Talk Time receives
payment on the equipment at time of delivery and payment on data
services every year for 5 years. All payments are non-refundable.
•
Talk time does not sell the equipment and data services separately.
This factor could be an indication of one unit of account.
•
A customer can sell the teleconferencing equipment. This factor could
be an indication of more than one unit of account.
•
All payments are non-refundable. This factor could be an indication of
one unit of account.
•
Industry practice is to sell the equipment and data plan together. This
factor could be an indication of one unit of account.
Talk Time does not sell the equipment and data services separately. While it
may be possible to get another vendor to provide data services separately, the
industry practice is that vendors provide the equipment and the related data.
•
Another vendor can provide the maintenance services. This factor
could be an indication of more than one unit of account.
BDO | Revenue Recognition
How is consideration allocated to each component of a multiple deliverable arrangement?
When the substance of the arrangement follows that the revenue recognition criteria are applied to the deliverables as multiple units of account, there are
usually three methods for allocation of the consideration:
•
relative fair value;
•
residual method; or
•
cost plus margin.
When the substance of the arrangement follows that all of the elements represent a single unit of account, then revenue is typically deferred and amortized
over the contract term or until all significant performance obligations have been performed.
The example below illustrates that the method used will result in different amounts of revenue that are recognized for each component. Therefore, it is
important that the method of allocation is disclosed appropriately.
Assume a multiple deliverable arrangement with two deliverables X and Y. The total consideration is $120 for a two-year contract. Assume at year end, X
has been delivered and Y has not been delivered.
MULTIPLE DELIVERABLE ARRANGEMENT
SINGLE UNIT OF ACCOUNT
Relative fair value method
Residual method
Cost plus margin
Deferral and amortization of
revenues
Assume the fair value of X is $100
and fair value of Y is $50.
The fair value of Y is $50.
Assume that the entity does not
have a reliable estimate for fair
values of X or Y so it uses its best
estimate of selling price for each
deliverable to allocate the
consideration.
The total revenues are amortized
over the life of the contract.
Therefore, $60 would be recognized
as revenue each year ($120/2 years).
Assume of the $120 of total
consideration, $70 has been
received at the end of year one.
Based on the fair values, 100/150
of the total consideration of $120
should be allocated to component X
and 50/150 should be allocated to
component Y.
Based on the fair value of the
undelivered component, $70 should
be recognized in revenue for the
delivery of X and the remaining $50
should be deferred until component
Y is delivered.
Therefore, the following amount
of revenue is recognized for each
element:
Therefore, the following amount
of revenue is recognized for each
element:
X — $80
X — $70
Y — $40
Y — $50
The following information exists
for component X and component
Y based on management’s best
estimate.
Cost
Profit
Margin
Selling
Price
X
$60
40%
$84
Y
$50
30%
$65
Based on the relative selling prices,
84/149* $120 should be allocated
to X and (65/149* $120) should be
allocated to Y
Therefore, the following amount
of revenue is recognized for each
element:
X — $68
Y — $52
DR Cash $5.5
$70
CR Revenues $1.5
$60
CR Deferred Revenues
$10
BDO | Revenue Recognition
What type of disclosure is required for an arrangement with multiple deliverables?
What needs to be included:
•
Accounting policy for each element
•
How multiple elements are determined
•
How multiple elements are valued
•
Description and nature of arrangement
•
Description of any performance, cancellation, termination or refund-type provisions
•
Description of judgments applied in determining whether the elements are treated distinctly or bundled.