Life Sciences Checklist For Revenue Recognition Readiness

By Katerina Starkova, CPA

Whether you’re already on the path to compliance or just getting started, it pays to be thorough in your understanding and assessment of areas where the new ASC 606 revenue recognition standard can impact your business.

The new standard is more principles-based than the existing standards and will require companies to exercise more judgment. It will be effective for fiscal years beginning after December 15, 2017 for public companies and for fiscal years beginning after December 31, 2018 for private entities. For life sciences companies, the new rules will mostly affect the accounting for collaboration agreements, measuring variable considerations, accounting for licensing arrangements and contracts with distributors.

Impact On The Life Sciences Industry

While every entity will now follow the new five-step approach to recognizing revenue, there are nuances of the regulation that specifically affect companies in the life sciences industry including:

• There are now two types of licenses recognized in the new standard, with different revenue recognition rules.
• Complex licensing arrangements will require careful consideration to determine whether the performance obligations should be accounted for separately.
• Variable consideration in contracts requires the estimating total transaction price and reassessing it during each reporting period.
• Royalty revenue is a form of variable consideration and will be estimated using either the expected value (probability-weighted estimate) or most likely amount approach.
• Sell-through approaches with distributors result in revenue being recognized when control of the product transfers to the customer.
• A warranty purchased separately is accounted for as a separate performance obligation.

A Checklist For A Smooth Transition

Step 1: Conduct an analysis of your current revenue recognition processes compared to the new standard and identify gaps.
Step 2: Create an implementation plan to address the gaps.
Step 3: Review your plan with auditors and CPAs to make sure they agree with your proposed changes.
Step 4: Review and upgrade/replace current accounting systems to support the new standard and related disclosure requirements.
Step 5: Review accounting processes and revise accordingly.
Step 6: Review customer contracts and update accordingly.
Step 7: Review and revise internal controls as needed.
Step 8: Train staff on new processes and systems.
Step 9: Communicate the impact of the standard to executives, board members, legal staff, marketing and media relations teams, investors and lenders.

Katerina Starkova, CPA, is an audit partner at San Francisco Bay Area-based accounting firm Armanino LLP.