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Adoption of Accounting Standards

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Hemo-Tech Inc. (“Hemo”) has entered into an agreement with Extract Co. (“Extract”) to provide certain equipment and services. Within the agreement, Hemo has identified five units of equipment, 50 boxes of equipment supplies, installation, one-year monitor and test services, and three-year screen and report services as deliverables. Hemo has identified these deliverables based on its adoption of Accounting Standards Code 605-25 and updated by FASB ASU 2009-13. Advice provided from Ernst & Young’s guide on ‘Revenue recognition-Multiple element arrangements’, which is based on ASC 605-25, states that a deliverable generally includes all performance obligations imposed on a vendor by an agreement and a deliverable may be an obligation to provide goods, an obligation to deliver services, a right or license to use an asset, or some other vendor performance obligation that was bargained for as part of the arrangement (“Revenue recognition – Multiple element arrangements”, 2012).

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The advice also states that an item is presumed to be deliverable if: 1) It is explicitly referred to as an obligation of the vendor in a contractual agreement; 2) It requires a distinct action by the vendor; 3) The vendor’s failure to complete an action would result in significant contractual penalty; 4) The inclusion or exclusion of the item in the arrangement reasonably would be expected to cause the arrangement consideration to vary by more than an insignificant amount (“Revenue recognition – Multiple element arrangements”, 2012). Based on the preceding criteria, there are several other deliverables that Hemo should identify in the arrangement. They include Hemo’s responsibility to maintain a duplicate copy of screen and report results for a period of one year after screening and Hemo’s service warranty for a 1-year period following installation, because they both require a distinct action from Hemo. Additional deliverable is the exclusivity of the sales agreement to Extract and the responsibility to replace equipment to comply with FDA standards because the inclusion or exclusion of this item would cause the arrangement consideration to vary by more than an insignificant amount.

Hemo needs to allocate arrangement consideration to all the deliverables identified and needs to determine the selling price for each deliverable in order to do so. In addition to looking to ASU 2009 – 13 to assist Hemo in deciding whether to use vendor-specific objective evidence (VSOE), third party evidence (TPE), or its best estimate of the selling price (ESP) to determine the selling price of certain deliverables, it should also look to guidance issued by FASB in October 2009 – Accounting Standards Update (ASU) 2009-14, Software (Topic 985): Certain Revenue Arrangements that Include Software Elements. Within this guidance is a tier that places VSOE on the top that must be used if it is available and TPE if it is not and only ESP if neither are available (McGeever, n.d.).

According to McGeever VSOE is specific to a company, not another one and there is evidence supported by factual data and information. VSOE is also used mainly with the sale of software so it would not apply to any of Hemo’s deliverables. Since there is third party evidence available of comparable equipment, Hemo should use TPE to determine a selling price for its equipment. There is no third party evidence available for the discount on the future supplies or the screen and report services so Hemo should use ESP to determine the selling price of those deliverables. References

Revenue recognition – Multiple element arrangements. (2012, May). Ernst & Young Retrieved from http://www.ey.com/publication/vwluassetsdld/financialreportingdevelopments_ bb1843_revenuerecognition_multipleelement_may2012/$file/financialreportingdevelopments_bb1843_revenuerecognition_multipleelement_may2012.pdf?OpenElement. McGeever, J. (n.d.). Retrieved from http://www.netsuite.com/portal/resource/articles/eitf-08-01- best-practices-for-adoption.shtml

Cite this Adoption of Accounting Standards

Adoption of Accounting Standards. (2016, May 18). Retrieved from https://graduateway.com/adoption-of-accounting-standards/

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