Accounting & Audit Alert- How to account for collaborative agreements
Today, many companies share research or technology to develop new products. For example, manufacturers might enter into a joint venture to conduct scientific research to design a new medical device. Or a watchdog group might work with a production company to create and distribute a documentary film.
How revenue and other payments between the parties are reported can have a major impact on a participant’s income statement. So, it’s important to get it right. Unfortunately, the accounting rules for so-called “collaborative arrangements” remain somewhat murky, despite updated guidance from the Financial Accounting Standards Board (FASB).
Companies set up collaborative arrangements largely to share costs. Accounting Standards Codification (ASC) Topic 808, Collaborative Arrangements, provides guidance for income statement presentation, classification and disclosures related to collaborative arrangements. It lists three requirements for collaborative arrangements:
- They involve at least two parties (or participants),
- All parties involved are active participants in the activity, and
- All participants are exposed to significant risks and rewards dependent on the commercial success of the activity.
Topic 808 doesn’t provide comprehensive recognition or measurement guidance. Often, the accounting for these arrangements is based on an analogy to other accounting literature or an accounting policy election.
As companies began implementing Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), calls for clarity on collaborative arrangements increased. So, the FASB added this topic to its agenda in 2016.
In November 2018, the FASB issued an updated standard that went into effect in fiscal year 2020 for public companies and in fiscal year 2021 for private organizations. But the final version of the guidance was scaled back from what the FASB initially proposed. Items that didn’t make the final version of the updated guidance include:
- Transactions with a collaborative arrangement participant that are directly related to third-party sales of either participant in the arrangement, and
- Nonrevenue transactions between the participants.
Although the updated guidance doesn’t solve broader problems about the accounting for collaborative arrangements, it does address concerns related to revenue recognition. Specifically, ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606, states that when a collaborative participant is a customer, the contract should be accounted for under Topic 606, including the recognition, measurement, presentation and disclosure requirements. But the parts of a collaborative arrangement that aren’t in the scope of the revenue recognition standard should be presented separately.
The FASB has acknowledged that questions will likely continue about the guidance for collaborative arrangements. If you’re uncertain how to report these transactions, we can help you determine whether transactions are covered by other accounting literature and, if not, develop a reasonable, consistent accounting policy for them. Contact us for more information.