Income Statement and Milestone

Topics: Income statement, Income, Generally Accepted Accounting Principles Pages: 6 (2124 words) Published: October 2, 2011
When should the milestone payments received to date by SolvGen be recognized as revenue? A: FASB codification (605-28) milestone method
SolvGen Inc. is gonging to use the milestone method to recognize the revenue. The milestone method is a recently issued method of recognizing revenue for research and development arrangements under which consideration to be received by the vendor is contingent upon the achievement of certain milestones(FASB codification (605-28) milestone method). Under the commonly applied milestone method, a vendor recognizes revenue in the period during which the milestone is achieved. Each milestone is essentially treated as a separate contract for accounting purposes. The milestone method applies only to (a) research and development deliverables or (b) units of accounting under which the vendor satisfies its performance obligations over a period of time and some or all of the consideration is contingent upon uncertain future events or circumstances, The milestone method is the only acceptable method for recognizing deliverable consideration or unit of accounting consideration contingent upon achievement of a substantive milestone as revenue in its entirety in the period in which the milestone is achieved。 In order to recognize revenue related to a milestone, the milestone must be considered substantive in its entirety (i.e., milestone consideration may not be bifurcated into substantive and non-substantive components). Requires that (1) determining whether a milestone is substantive should be made only at the inception of the arrangement, and (2) to be substantive, consideration earned from the achievement of a milestone should: Be commensurate with the vendor's performance to achieve the milestone or with the enhancement of the value of the delivered items. Relate only to past performance (no portion of the milestone may relate to remaining deliverables and no portion may be refundable or adjusted through penalty based on future performance). Be reasonable relative to all the deliverables and payment terms of the arrangement. SolvGen Inc’s proprietary instrument systems have been under development for nearly 18 months and are expected to be ready for commercial launch in the near future. So SolvGen Inc’s performance to achieve the milestone or the enhancement of the value of the delivered items.

注释:The FASB has recently issued guidance (ASU No. 2010-17) on the use of the milestone method of recognizing revenue for research and development arrangements under which consideration to be received by the vendor is contingent upon the achievement of certain milestones.   Accounting Standards Update (ASU) No. 2010-17 , Milestone Method of Revenue Recognition, amends FASB ASC 605-10-05 and FASB ASC 605-10-25 and adds subtopic FASB ASC 605-28 to provide guidance on the criteria that must be met for determining when to apply the milestone method. SolvGen Inc. is a pharmaceutical development company that provides research and instrument systems. With SolvGen Inc main deliverables being research and launches of their instrument systems the best method for revenue recognition would be the milestone method. WHAT IS MILESTONE METHOD

The milestone method for revenue recognition is primarily used for the research and developmental industry. When using the milestone method, companies record revenue when a phase of the research has been completed or an important result has been achieved, i.e. completing the research or having the development deliverables completed. These phases and deliverable are also known as a substantive milestone. According to FASB the following criteria must be met before a company is able to label a deliverable as a substantive milestone: • “The milestone consideration must be proportionate with 1) the vendor’s performance to achieve the milestone or 2) the delivered item’s enhanced value resulting from the specific outcome of the vendor’s performance to achieve the...
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