Accounting & Auditing

New guidance in Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, will redefine how to split a multiple-deliverable arrangement into units of account and replace the fair value requirement in the allocation guidance with selling price. These changes will help close a long-recognized gap between performance and revenue recognition in U.S. generally accepted accounting principles.

Units of Account

Units of account are deliverables that have value to the customer on a standalone basis. If a right of return exists, delivery must be probable and in your control for the deliverable in question to be considered a unit of account.

Hierarchy of Evidence

Revenue is recognized on a unit of account when the goods are delivered or the service is rendered. However, the amount of revenue recognized and the timing of that recognition could be different under the new standard. The standard establishes a price determination hierarchy used to apportion the selling price ratably across all units of account.

Similar to previous guidance, fair value remains at the top of the selling-price allocation hierarchy. If there is guidance requiring a unit of account be recorded at fair value and revalued in each period thereafter, that portion of the sale is recorded at fair value with the remainder of the selling price apportioned to the remaining units of account.

The next rung on the hierarchy is vendor-specific objective evidence (VSOE). A vendor has VSOE if they have a price charged for a deliverable when it is sold separately. If a deliverable is not yet sold separately, but management intends to do so, a price established by management having the relevant authority also is considered VSOE. To qualify as VSOE, it must be probable that the price established by management will not change before the unit of account is introduced into the marketplace as a standalone product.

The next lowest level is third-party evidence (TPE). TPE is the price a competitor would charge to similarly situated customers for a largely interchangeable product or service.

The lowest rung on the hierarchy is management’s best estimate. If no VSOE or TPE is available and management has made a reasonable effort to identify any evidence that might exist, then management may make a reasonable estimate of the standalone selling price of the deliverable. This is a significant departure from previous guidance. Previously, if VSOE or TPE was unavailable, a deliverable could not be considered a unit of account, and no revenue could be recognized on it until all other units of account had been delivered.

Effective Date

Contracts entered into or significantly modified in fiscal years beginning on or after June 15, 2010, will apply the provisions of this standard.

Effect

In many instances, the new guidance will speed up revenue recognition. Where revenue may not have been recognized on a delivered unit of account in the past because sufficient evidence of the relative fair value of the deliverable was not available, it may be possible to establish a relative selling price under the new standard and recognize revenue accordingly.

Contact your BKD advisor with questions on how this ASU might affect you.