To our clients and other friends
Many companies provide multiple products or services (“deliverables”) to their customers as part of a
single arrangement. These arrangements may range from relatively simple arrangements for the
delivery of multiple products on a single date (e.g., when a retailer sells a personal computer and printer
to a customer and delivers each concurrently) to highly customized, complex arrangements designed to
provide an integrated solution to a customer’s business needs (e.g., when a vendor agrees to design and
build equipment to increase the efficiency of a customer’s business process, and to then maintain the
equipment and run it on an outsourced basis for an extended period).
Companies’ products and service offerings continue to evolve and become more complex in reaction to
the needs of their customers. Bundled deliverables within an arrangement and with varying payment
terms have become commonplace, consequently increasing the difficulty of accounting for such
transactions. These payment terms may not always require payment at the product or service’s delivery
date, but may instead precede or follow delivery. Accordingly, it may not be readily apparent which
payment, or what portion of a payment, relates to which deliverable included in an arrangement. Practice
questions frequently arise on whether, and if so, how, to allocate the arrangement consideration to the
individual deliverables. Additionally, restatements resulting either from the misapplication of revenue
recognition principles to a multiple-element arrangement or the improper allocation of arrangement
consideration to the various elements included in a multiple-element arrangement remain common.
The guidance on accounting for arrangements with multiple deliverables is primarily codified in ASC 605-25,
Revenue Recognition — Multiple-Element Arrangements. ASC 605-25 provides guidance on the separability
of deliverables included in an arrangement into different units of accounting and the allocation of an
arrangement’s consideration to those units of accounting. However, it does not address when revenue
should be recognized for the units of accounting. Companies should apply other applicable revenue
recognition guidance (e.g., the revenue recognition guidance in SAB Topic 13) to determine when
arrangement consideration applicable to a deliverable that qualifies as a separate unit of accounting
should be recognized as revenue.
Past and future modifications to the multiple-element arrangements guidance
In May 2014, the Financial Accounting Standards Board (FASB or Board) and the International
Accounting Standards Board (IASB) (collectively, the Boards) issued largely converged revenue
recognition standards. Once effective, this new guidance will replace virtually all current revenue
recognition guidance, including the multiple-element arrangements guidance in ASC 605-25. See our
Financial reporting developments (FRD)
, Revenue from contracts with customers (ASC 606)
for
additional guidance on the new revenue standard
.
Under US GAAP, the standard is effective for public entities for fiscal years beginning after 15 December
2017, and for interim periods therein. Nonpublic entities are required to adopt the new guidance for
fiscal years beginning after 15 December 2018, and interim periods within fiscal years beginning after
15 December 2019. US GAAP public and nonpublic entities will be permitted to adopt the standard as
early as annual reporting periods beginning after 15 December 2016, and interim periods therein. Early
adoption prior to that date is not permitted.
To our clients and other friends
We hope this publication will help you understand and successfully apply the provisions of ASC 605-25.
Ernst & Young professionals are prepared to assist you in your understanding and are ready to discuss your
particular concerns and questions.
March 2018。