Accounting for Collaborative Arrangements
The Financial Accounting Standards Board (FASB) has issued new guidance about how entities should account for collaborative arrangements. Because there was no previous guidance, this led to businesses employing a variety of standards and processes when it came to collaborative agreements. The diversity in approach caused some confusion that the new guidelines hope to simplify.
What are Collaborative Arrangements?
A collaborative agreement is simply two entities that agree to work together to complete business tasks. Typically, there is a contract in place that establishes the guidelines of the agreement. Because all parties are subject to both potential success and risk, it’s important that the arrangement is clearly explained via the contract.
Key Points of the New Guidance
The primary areas of focus for the new guidance are revenue scoping, a unit of account, and non-revenue transactions.
The scope of the new revenue recognition standard appeared not to be included in collaborative arrangements, previously. New guidance indicates that the collaborative arrangements may be within the scope of Topic 606 if the unit of account is distinctly for a customer.
Unit of Account
Of course, in order to truly identify what falls within the scope of Topic 606, the unit of account must be clearly identified. In order to be in true accordance, the collaborative participant is a customer for part or parts of the transaction. However, if the bundle of goods or services is not with a customer, then it does not meet the criteria to be considered a unit of account.
Just as important, is identifying which transactions are considered “non-revenue transactions.” The new guidance indicates that an entity must base its accounting policy on an analogy to the authoritative accounting literature. If the entity is unable to do this, then they should instead rely on a reasonable accounting policy election. A non-revenue transaction model was officially created by the new guidelines.
There’s no way to determine how the new guidelines will impact every single entity, but it will be important that they align their policies with the latest standards. Those that already have a similar process in place will not be as impacted as those that do not.
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