INSIGHTS

lease

FASB Clarifies Guidance on Collaborative Arrangements

In April 2018, the Financial Accounting Standards Board (FASB) released for public comment a proposed amendment intended to clarify the scope of its standard for collaborative arrangements. If finalized, the proposed amendment to U.S. Generally Accepted Accounting Principles (GAAP) will help partners in a collaborative arrangement determine when a transaction should be treated as revenue.

 

The basics

Under current U.S. GAAP, a collaborative arrangement is “a contractual arrangement under which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the activity’s commercial success.”

Collaborative agreements come in all shapes and sizes. Participants in a collaborative arrangement generally agree to share revenue and costs from the arrangement. One example is a partnership to conduct scientific research to design a new medical device. Another is a joint venture to produce and distribute a documentary film.

 

Old rules, new proposal

The accounting treatment for transactions involving participants to a collaborative agreement is somewhat vague under existing GAAP. Accounting Standards Codification (ASC) Topic 808, Collaborative Arrangements, doesn’t include recognition and measurement guidelines.

For example, it doesn’t provide rules for determining the appropriate unit of accounting or when recognition criteria are met. Rather, it says to look to other areas of GAAP to account for a transaction. The guidance has led to inconsistent practices that may cause participants to label items as “revenue” when they belong elsewhere on the income statement.

The new revenue recognition standard has added to the confusion. Before the publication of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), revenue from a collaborative arrangement may have included:

  • Revenue that was recognized according to FASB ASC Topic 605, Revenue Recognition,
  • Revenue that was recognized through what the FASB calls an analogy to ASC 605, and
  • Revenue that was recognized through the election of an accounting policy.

Proposed ASU 2018-240, Collaborative Arrangements (Topic 808): Targeted Improvements, aims to clarify the interaction of the standards for collaborative arrangements and revenue recognition.

 

Key changes in the works

The three main objectives of the proposed standard include:

  1. Adding unit-of-account guidance in Topic 808 that’s aligned with the guidance in the new revenue recognition guidance (ASC 606),
  2. Clarifying that a participant to a collaborative arrangement may qualify as a customer, in which case transactions between the participants should be accounted for as revenue — and all of ASC 606 should be applied to the transaction, including the recognition, measurement, presentation and disclosure requirements, and
  3. Amending the guidance to indicate that, when neither participant to a collaborative arrangement is a customer, transactions that aren’t directly related to third-party sales should not be presented as revenue — instead, the transaction falls within the scope of other ASC topics.

The effective date for the proposed changes will be determined once the FASB has reviewed the feedback it receives in response to the proposal.

 

Coming soon

The comment period for the new proposal on collaborative agreements ends on June 11. From there, the FASB is expected to move quickly to facilitate the implementation process for this standard and the new-and-improved revenue recognition standard — which goes into effect for public companies in 2018 and for private ones in 2019.

 

©2018 THOMSON REUTERS

RECENT POSTS

Lutz Tech Adds Neil Wardyn to Grand Island Office

Lutz, a Nebraska-based business solutions firm, welcomes Neil Wardyn to the Lutz Tech division in the Grand Island office. Neil joins the firm as a Virtual Chief Technology Officer. He is responsible for architecting short-term and long-term…

read more

How ESOPs Can Benefit Companies and Their Owners

As the business owner of a profitable business, you may want to take some risk out of the picture but you’re not ready to sell the company to a third party. What are some other options? One often overlooked and underutilized…

read more

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850