The FASB recently issued proposed guidance clarifying how to account for collaborative arrangements. Collaborative arrangements are often entered into by life science and biotech companies who agree to work together on research and development of new drugs and devices. By definition, a collaborative arrangement is a contractual arrangement between at least two parties who actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success.
The current standard on these arrangements doesn’t provide comprehensive recognition and measurement guidance, and the accounting is often based on analogy to other accounting literature. This led to diversity in practice, particularly with revenue recognition. The implementation of the new revenue recognition standard (Topic 606) has created even more confusion given that standard requires a contract to include a customer in order to recognize revenue.
The proposed standard would provide guidance on whether certain transactions between collaborative participants should be accounted for as revenue in accordance with Topic 606. For arrangements that don’t involve sales to third parties, revenue would only be allowed if one of the participants meets the definition of a customer.
The FASB is seeking comments on this proposal through June 11, 2018. I believe this one will get finalized pretty quickly given the confusion that currently exists.
For more information, please contact Audit Director, Nathan Hartman.