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By: Robert L. Sommerville, CPA
The FASB recently issued Accounting Standards Update No. 2010-17, Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition (a consensus of the FASB Emerging Issues Task Force). The new guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. Accounting Standards Update.
Essentially, this is some more tweaking of the milestone method by the EITF impacting research and development-type contract. The main factors seem to be more emphasis that a milestone be “substantive” and that all aspects of the milestone achieved before revenue can be recognized. Here is an excerpt:
“The consideration earned by achieving the milestone should:
1. Be commensurate with either of the following:
a. The vendor’s performance to achieve the milestone
b. The enhancement of the value of the item delivered as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone
2. Relate solely to past performance
3. Be reasonable relative to all deliverables and payment terms in the arrangement.
A milestone should be considered substantive in its entirety. An individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated separately to determine whether the milestone is substantive. Accordingly, an arrangement may contain both substantive and nonsubstantive milestones.”
Still a lot of judgment involved. Welcome to “principles-based” accounting!
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