Eye Vision Case 10-11
Eye Vision Inc, a long-standing medical device manufacturer, has signed a contract to sell Holland Hospital the Clear View Laser and a two-year separately priced maintenance plan for $1 million and $0.2 million respectively. On a when-and-if available bais, Eye Vision Inc. will provide software updats that is embedded with the Laser to maintainance purchasor. The software has never been sold without Laser for its functional necessity. In this memo, as explained below, we conclude that: 1. Eye Vision’s arrangement with Holland Hospital is not within the scope of ASC 985-605, Software: Revenue Recognition. 2. The deliverables in this arrangement are the Clear View Laser, embedded software, and maintenance plan, respectively. 3. The Clear View Laser together with embedded software and maintenance plan will be accounted for as separate units of accounting, respectively. 4. The laser with the embedded software will be recognized immediately. The maintenance plan will be recognized on a straight-line basis over the length of the contract. 1. Is Eye Vision's arrangement with Holland Hospital within the scope of ASC 985-605, Software: Revenue Recognition? The agreement between Eye Vision and Holland Hospital is not within the scope of ASC 985-605, Software: Revenue Recognition. According to ASC 985-605-15-4(e), subtopic ASC 985-605 does not apply to transactions and activities for "software components of tangible products that are sold, licensed, or leased with tangible products when the software components and nonsoftware components of the tangible product function together to deliver the tangible product's essential functionality." In the situation of the agreement, the clear view laser represents the tangible component, while the software component comes embedded internally within the laser. The case states, that the laser has never been sold without the software because the software is essential to its functionality in performing medical procedures. We would like to consider both the Clear View Laser along with the embedded software as one tangible product. Further, ASC 985-605-15-4(f) goes on to state any "undelivered elements that relate to software that is essential to the tangible product's functionality in (e)" would be considered out of scope. The maintenance plan, if purchased, would be defined as an undelivered element that relates to the software that is essential to the tangible product's function. Therefore, we conclude that ASC 985-605 is not with in the scope of the arrangement and ASC 605-25, Revenue Recognition: Multiple-Element Arrangements should be used for proper rvenue recognition. 2. What are the deliverables in this arrangement?
The three deliverables in this arrangement between Eye Vision and Holland Hospital are the Clear View Laser, the embedded software and the maintenance plan. According to ASC 605-25-15-2, deliverables within contractually binding arrangements include products, services, or rights to use assets. Beyond that, ASC never defines what a deliverable is. Thus, determining whether the elements are separate deliverables is a matter of judgment. In this case, the Clear View Laser is the main product sold by Eye Vision and is definitely a deliverable. The software provides Clear View Laser with additional functionalities other than what the laser alone could have done. Additionally in the future after the updating performed by the maintainance plan, the embedded software is necessary to perform the latest medical procedures for which the laser will be intended to, it should be considered another separate product or deliverable. As to the maintenance plan, it is sold by Eye Vision separately as an after-sale service, making it the third separate deliverable. Alternative / Opposing Approach
One could argue that the Clear View Laser together with the embedded software is one deliverable. Both of the laser and the software cannot stand on their own as a separate...
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