TO: Professor Charles
FROM: Eric Theurer
DATE: November 15, 2011
RE: Revenue Recognition for Research and Development and License and Distribution Agreements
SolvGen Inc. (SolvGen), a Pharmaceutical development company has entered a research and development contract with Careway Pharma Inc. (Careway) lasting 5 years. According to the agreement, SolvGen is to commercially sell Careway’s recently built instrument systems to customers. They have received milestone payments from Careway during the past year. However, according to the Securities and Exchange Commission (SEC), these payments need to be accurately accounted for in conformity with the SEC’s regulations and rules.
With regards to the deliverables for the arrangements, there are a few different deliverables described. The ...view middle of the document...
The milestone payments received to date by SolvGen should be recognized as revenue over the expected period of the related research program. A portion of each milestone payment is recognized when the milestone is achieved based on the percentage of the research term that has emerged. Any balance is recognized over the remaining research period. Each milestone payment should be classified separately to determine whether the milestone is considerable. It’s contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. Therefore, SolvGen should recognize the revenue for the percentage completed from milestone one and two at the time of milestone two, since it starts of the contract. Milestone three should be recorded at the end of its own period because value is being added even as performance is achieved. Lastly, Milestone four and five fall into the same lines as milestone three, they will be recorded when each milestone is paid. Policies for recognizing deliverable consideration can be applied consistently to similar deliverables or sections of accounting. (ASC 605-25-55-37)
The milestone payments received to date by SolvGen should be recognized as revenue by a certain date based on the percentage completed. The deliverable for the arrangement of the license and distribution agreement is, once SolvGen delivers a product to Careway to sell they will be able to recognize the revenue. The deliverables for the arrangement of the research and development agreement are, the vendor’s performance to achieve the milestone, or the enhancement of the value delivered item resulting from the vendor’s performance and exclusively related to past performance.