Collaboration agreements are common in certain industries, including the life science and technology industries. However, they are becoming more prevalent. Companies set up collaborative arrangements largely to share costs, but also to share research and development, resources, intellectual property and other assets, all to achieve a common goal. These arrangements can take many different forms that have different accounting implications. This article focuses on the accounting for collaborative arrangements under ASC 808, Collaboration Agreements (“ASC 808”) and how revenue and payments between the parties are reported. 

Scope

ASC 808 defines a collaborative arrangement as follows:

“A contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties that meet both of the following requirements: 

1. they are active participants in the activity and 
2. they are exposed to significant risks and rewards dependent on the commercial success of the activity.”

Examples of collaborative arrangements include jointly developing and commercializing a drug candidate or technology. Companies may enter into partnerships, strategic alliances, and collaborations to fund research and development (“R&D”) activities.  One party may perform R&D while the other may market and sell. Many companies look to collaboration agreements in order to fund R&D. 

Collaborative arrangements under ASC 808 are usually structured through contractual arrangements, and not through a separate legal entity created specifically by the participants. When a separate legal entity is set up to perform the joint operating activity, ASC 808 no longer applies, and the participants should determine whether the arrangement qualifies for joint venture accounting.  If the arrangement does not qualify for joint venture accounting, the participants may need to apply the equity method of accounting.

Accounting Guidance

ASC 808 does not provide recognition or measurement guidance, only guidance for the presentation and disclosure of collaborative arrangement transactions. Often, the accounting for these arrangements is based on an analogy to other accounting literature or an accounting policy election. Due to the lack of clear guidance, companies have historically had significant latitude to apply their own judgment, leading to a diverse range of accounting policies and practices.

On Nov. 5, 2018, the FASB narrowed this gap by issuing ASU 2018-18, which amends the ASC 808 to provide guidance on accounting for consideration received from a collaborative arrangement participant. It specifically addressed three key areas: revenue scoping, unit of account, and non-revenue transactions.

Revenue scoping

The ASU clarified that collaborative arrangements may be partially within the scope of Topic 606 in a transaction between collaborative participants that is with a customer and the goods or services are distinct within the collaborative arrangement. A customer is a party that is purchasing goods or services that are an output of the entity’s ordinary activities. In these instances, all aspects of ASC 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.

Unit of Account

The first step in determining whether a particular transaction falls within the scope of ASC 606 is determining the “unit of account.” A unit of account is within the scope of ASC 606 if the counterparty in a collaboration is a customer for part or parts of the transaction and the goods or services are distinct in accordance with ASC 606.

To determine the unit of account, ASC 606 first requires companies to assess whether a good or service is capable of being distinct. Then the good or service must be assessed to see if they are separately identifiable from other promises in the contract (i.e., distinct within the context of the contract). 

After determining the units of account, the company should determine if each unit of account is a transaction with a customer. If the unit of account is a transaction with a customer, ASC 606 should be applied to that unit of account. If the unit of account is not a transaction with a customer, ASC 606 should not be applied. 

Non-revenue transactions

The new ASU did not specifically address accounting for transactions that do not qualify for revenue recognition under ASC 606. However, the ASU requires companies to account for these non-revenue transactions by analogy to authoritative accounting literature. If there is no appropriate analogy, the company may use a reasonable and consist accounting policy election. It also prohibits companies from presenting a transaction with a collaborative participant as revenue under ASC 606 if the transaction is not with a customer. 

Given that the ASU did not provide specific guidance for these non-revenue transactions, the accounting for these non-revenue transactions did not change and judgment needs to be applied. As a result, diversity in how companies account for these transactions will continue. 

Presentation of revenue/payments

3rd party transactions

For costs incurred and revenue generated from third parties, the participant in a collaborative arrangement that is deemed to be the principal under ASC 606 will record that transaction on a gross basis in its financial statements.

Transactions between participants

Payments between participants in a collaborative arrangement that are within the scope of other authoritative accounting literature on income statement classification should be accounted for under the provisions of that literature. If the payments are not within the scope of other authoritative accounting literature, the income statement classification for the payments should be based on an analogy to other authoritative accounting literature or by a reasonable and consistently applied accounting policy election if there is no appropriate analogy.

Subsequent accounting

Participants in a collaborative arrangement should reevaluate whether an arrangement continues to be a collaborative arrangement whenever there is a change in the roles of the participants or their exposure to significant risks and rewards. For example, the exercise of an option could change a participant’s role in the arrangement or its exposure to risks and rewards.