Life sciences companies: Revenue recognition is changing
INSIGHT ARTICLE |
Now is the time for life sciences companies to address the effects on their businesses of the new revenue recognition guidance in Topic 606, Revenue from Contracts with Customers, of the Financial Accounting Standards Board’s Accounting Standards Codification. There’s an urgency for emerging growth and middle market life sciences companies, in particular, to address these effects as many may not currently have the necessary resources in place to support implementation of the new guidance. The following provides a brief summary of considerations for life sciences companies. For detailed information, please read Revenue recognition: A whole new world.
Considerations for life sciences companies
Public entities with a calendar year-end must implement the new guidance no later than the year beginning Jan. 1, 2018 (with a limited exception for certain public business entities). All other entities with a calendar year-end must implement the new guidance no later than the year ending Dec. 31, 2019. The core principle in ASC 606-10-10-2 of the new guidance is for an entity to “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” A new five-step process has been identified to support this core principle. The steps include:
Key areas that must be addressed under the new guidance include the following:
- Determining whether collaboration agreements are in the scope of the new guidance
- Identifying the performance obligations (i.e., units of account)
- Measuring and recognizing variable consideration
- Allocating the arrangement consideration or transaction price to the units of account
- Determining whether revenue should be recognized over time or at a point in time
- Accounting for licenses of and rights to use intellectual property
- Accounting for sales involving distributors
- Accounting for contract manufacturing and contract research services
- Satisfying the new disclosure requirements
For further discussion, read Changes to revenue recognition in the life sciences industry.
What should you do to prepare?
Changes to resources and systems take time to implement, and with deadlines approaching, all life sciences companies should have already started taking steps to make the changes. Even if your life sciences business is pre-revenue, it is in your company’s best interests to be proactive about transitioning legacy systems to newer enterprise resource planning systems.
Steps to consider in aligning your people, processes and technology include:
- Deﬁne the effects of adoption, including determining the appropriate revenue recognition under the new standard for each revenue stream; assisting with the determination of the appropriate methods of adoption and assessment of key judgments; and working with external auditors to discuss ﬁndings and preliminary conclusions.
- Develop a technology and implementation strategy, including mapping business requirements to applicable applications; developing a system conﬁguration and migration strategy; and testing system changes to ensure they are responsive to requirements.
- Implement standards changes, including supporting or drafting key policy memos and position papers, recasting historical transactions and validating results; developing templates and checklists to be utilized for ongoing assessments of contracts; and managing ongoing interactions with both external auditors and audit committee to ensure everyone is aligned.
- Evaluate internal controls, including assistance with identiﬁcation and design of appropriate processes and controls to support both pre- and post-implementation requirements.
Questions? Contact us for further information.
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