Revenue Recognition, ASC 605

Revenue Recognition

ASC 605-25 was updated by ASU 2009-13
–> to reflect the contents of EITF 08-1

EITF Issue No. 08-1
“Revenue Recognition with Multiple Deliverables
–> EITF No. 08-1 superseded EITF No. 00-21

EITF Issue No. 00-21
“Revenue Recognition with Multiple Deliverables

General Principles
1. Multiple-Deliverable Revenue Arrangements (MDRA)
–> divided into separate units of accounting
–> if two conditions listed in ASC 605-25-25-5 are satisfied

EITF 00-21 had three conditions.
EITF 08-1 deleted one condition.

2. Arrangement consideration is allocated
–> based on the relative selling prices
–> “relative selling price method”

[Note] EITF 00-21 used the “relative fair value method”

 Two conditions for a separate unit of accounting
1. Delivered items have value to the customer
–> on a standalone basis
2. Delivery of undelivered items is
–> considered probable and
–> under the substantial control of the vendor

EITF 00-21 had one more condition that was deleted by EITF 08-1
–> Undelivered items should have
–> the objective and reliable “evidence of fair value”

Relative selling price method adpted by EITF 08-1 (ASU 2009-13)
Arrangement consideration is allocated
–> at the inception of the arrangement
–> based on their “relative selling prices”

 Selling price is determined using
–> the “Vendor Specific Objective Evidence” (VSOE) of selling price

 If VSOE does not exist
–> use the “Third-Party Evidence” (TPE) of selling price

 If both VSOE and TPE are not available
–> use the “best estimate” of selling price

Examples of EITF 08-1
1. Cellular telephone contract
2. Can manufacturing equipment
3. Standard equipment installation
4. Automobiles sold with lifetime maintenance services
5. Sale of home appliances with installation and maintenance services
6. Human resources outsourcing services
7. Sale of medical equipment with cartridges and installation
8. Sale of computer system
9. Sale of 12 bolts of fabric
10. Painting contract
11. Agricultural equipment