Revenue Recognition - Multiple-Element Arrangements ASC 605-25 Highlights

Overview This topic addresses accounting by a vendor for arrangements under which there are multiple revenue-generating activities, including how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration should be measured and allocated to the separate units of accounting. Examples: May be multiple products, services, or rights May involve performance at different times or different periods of time. May include initial installation, initiation, or activation services in the form of a fixed fee or a fixed fee coupled with a continuing payment stream. Fees for continuing performance may be fixed, variable based on future performance, or a combination.

Scope Applies to all entities Applies to all deliverables products, services, or rights to use assets within contractually binding arrangements written, oral or implied in all industries under which a vendor will perform multiple revenue-generating activities.

Arrangements that include vendor offers to a customer for Does NOT apply to: Arrangements that include vendor offers to a customer for Free or discounted products or services delivered at a future date OR rebate or refund if the customer completes a specified cumulative level of revenue transactions or remains a customer for a specified length of time. Arrangements involving award credits by loyalty program operators Payments relating to R&D deliverables that are accounted for under the milestone method of revenue recognition (605-28)

Interaction with other topics If another topic addresses both separate units of accounting and allocation of consideration, apply that topic. If another topic addresses separate units of accounting but not allocation of consideration, allocate consideration per the relative selling price of the deliverables. If another topic addresses neither separate unit of accounting or allocation of consideration, follow this subtopic.

This subtopic does not address when the criteria for revenue recognition are met or provide the appropriate revenue recognition convention for a unit of accounting.

Recognition Again, this subtopic provides guidance for determining: units of accounting within a multiple deliverable arrangement and measurement and allocation of consideration among the separate units of accounting. Revenue arrangement with multiple deliverables shall be divided into separate units of accounting if certain criteria are met, and arrangement consideration shall be allocated among the separate units of accounting based on relative selling prices. Applicable revenue recognition criteria is considered separately for separate units of accounting.

Units of accounting: Separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and are considered a single arrangement in determining the units of accounting Evaluation of units of accounting is done at the inception of the arrangement

Delivered item(s) are considered a separate unit of accounting if both of the following criteria are met: Delivered item has value to the customer on a standalone basis: if they are sold separately by any vendor or if the customer could resell the delivered items on a standalone basis Does not require the existence of an observable market If the arrangement includes a right of return for the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

Initial Measurement Consideration is allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price, unless required under another topic to be recorded at fair value and marked to market each reporting period thereafter.

Selling price is determined using: vendor-specific objective evidence of selling price if possible (preferred) limited to either the price charged for a deliverable when it is sold separately or if not sold separately, the prics established by management having relevant authority or third party evidence of selling price Price for interchangeable products or services in standalone sales to similarly situated customers or worst case – use the best estimate of selling price. Consider market conditions as well as entity-specific factors

The amount allocable to a delivered item is limited to the amount that is not contingent upon delivery of additional items or meeting other performance conditions. The revenue per period is limited to the measurement assuming cancellation will not occur. An asset for the excess of revenue recognized over the amount of cash received shall not exceed all amounts to which the vendor is legally entitled, including cancellation fees. Consider whether the vendor intends to enforce cancellation fees in determining the amount of any asset.

Contractually stated prices for individual products or services in a multiple deliverable arrangement shall not be presumed to be representative of vendor-specific objective evidence, third-party evidence or a vendor’s best estimate of selling price.