The Financial Accounting Standards Board’s (FASB) new standard on revenue recognition, ASC 606, Revenue from Contracts with Customers, must be adopted by public companies in 2018. Although originally issued as a converged standard, the FASB and the International Accounting Standard Board (IASB) have made slightly different amendments, so the application of the guidance could differ under U.S. GAAP and IFRS.
The standard will improve the financial reporting of revenue and the transparency and comparability of revenue in financial statements globally.
The new revenue recognition standard is more principles-based than current revenue guidance. The U.S. GAAP standard is effective for public entities for fiscal years beginning after Dec.15, 2017 and for interim periods therein. Nonpublic entities are required to adopt the new guidance for fiscal years beginning after Dec. 15, 2018 and interim periods within fiscal years beginning after Dec. 15, 2019.
The new principles-based model will require important decisions and actions by life sciences companies that will likely affect your financial statements and business practices, as well as have potential tax implications.
The Revenue Recognition Transition Resource Group (TRG) has contemplated various implementation issues in a variety of industries.
For life sciences companies, the new revenue model will have the greatest impact on collaboration and licensing arrangements and sales to resellers and distributors.
Overview of standard
The standard developed a five-step model to determine when revenue from customer contracts should be recognized:
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) each performance obligation is satisfied
In addition, under the new standard, life sciences companies will have to estimate the consideration to which they expect to be entitled from the arrangement. An element of variable consideration (e.g., price concessions) may be recognized earlier than under current U.S. GAAP. Current U.S. GAAP requires recognition to be deferred until that contingent event occurs.
