Revenue Recognition for Multiple-Deliverable Revenue Arrangements – Early Adopt for 2009?

December 21, 2009

Do you have multiple-deliverable revenue arrangements (MDRAs)?  Do you fail the criteria in existing GAAP (EITF 00-21) to be able to separate out multiple-deliverables for revenue recognition.  If so, a newly approved FASB Accounting Standards Update (ASU) (2009-13) may provide you relief and you may want to early adopt this standard for 2009.  Otherwise it will apply prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.

“Currently, the absence of vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of selling price of the undelivered item in an arrangement is a common reason that vendors are unable to separate deliverables in an arrangement.  In those situations, the timing of revenue recognition may be (required to be) deferred until the delivery of the last deliverable or the entire fee may be recognized over the period during which the last deliverable is delivered or performed.”  (FASB ASC 605).  Many have found the existing rules a hardship and not reflective of the underlying economics.  The new rules will require allocation of the overall consideration to each deliverable using the estimated selling price based on VSOE, if available, TPE, if VSOE is not available, or the company’s estimated selling price if VSOE and TPE are not available.  The new rules will result in more MDRAs being divided into separate units of accounting than under the current rules.  This is called the relative selling price method.

The FASB standards include a number of examples to help you apply the new rules.  Examples includes cell phone sales multi-year service contracts, sales of bundled equipment that is sold separately by others, construction equipment sold with installation included, autos sold with included scheduled maintenance services, home appliances sold sometimes with bundled installation and maintenance services, bundled/unbundled human resources outsourcing services, sale of complex medical equipment with installation and supplies, sales of computer equipment including CPE, monitor and keyboard, fabric sold for use in manufacturing clothing sold with certain double-money-back guarantees, building painting services sold with or without paint included, bundled/unbundled farm equipment sold, biotech enters into an agreement with a pharmaceutical related to licensing rights and provision of research and development services   Of course, the new rules require significant additional footnote disclosures to help the readers understand the revenue recognition policies.  Read FASB ASU