Revenue Recognition: Multiple deliverable arrangements

February 06, 2015

Revenue recognition is an increasingly important topic for private companies operating in the Technology and Life Sciences sector. Revenue recognition policies are scrutinized by investors, potential acquirers and regulators alike.

As businesses move into a phase of rapid growth, they commonly enter into increasingly complex sales arrangements and different revenue streams. Revenue recognition accounting is consistently one of the key accounting risk areas for companies in this sector. Whether reporting under accounting standards for private enterprise (ASPE), international financial reporting standards (IFRS,) or even U.S. standards, understanding the risks when dealing with multiple deliverable arrangements and considering all relevant factors is critical for financial executives working in the T&LS sectors.

There are three topic areas that are of most concern for organizations when dealing with multiple deliverable arrangements when reporting under ASPE.

How do I determine whether the revenue recognition criteria are applied to the deliverables as a single unit of account or multiple units of account?

Factors to consider:

  • Are the transactions entered into at or near the same time?
  • Do the individual components have value to the customer on a stand-alone basis?
  • Is the occurrence of one transaction dependent on the occurrence of the other transaction?
  • Do other vendors sell both components together?
  • Does the entity routinely sell the components together or separately?
  • Is there another vendor that can sell the undelivered component to the entity and be compatible with the delivered component?
  • Is the pricing of the individual components reasonable or is the total price for all the components together more supportable?
  • Is there an upfront fee that is not linked to any deliverable?
  • Are there requirements to repurchase the product?
  • Has the delivery occurred or services been rendered?
  • What are the remaining performance obligations of the entity?

How is consideration allocated to each component of a multiple deliverable arrangement?

When the substance of the arrangement follows that the revenue recognition criteria are applied to the deliverables as multiple units of account, there are usually three methods for allocation of the consideration:

  • relative fair value;
  • residual method; or
  • cost plus margin.

When the substance of the arrangement follows that all of the elements represent a single unit of account, then revenue is typically deferred and amortized over the contract term or until all significant performance obligations have been performed.

The example below illustrates that the method used will result in different amounts of revenue that are recognized for each component. Therefore, it is important that the method of allocation is disclosed appropriately.

Assume a multiple deliverable arrangement with two deliverables X and Y. The total consideration is $120 for a two-year contract. Assume at year end, X has been delivered and Y has not been delivered.


What type of disclosure is required for an arrangement with multiple deliverables?


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Sciences Leader
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