FASB to Clarify Collaborative Arrangements Guidance

August 15, 2018

Pharmaceutical and biotechnology companies that set up joint ventures to develop drugs will receive new accounting guidance soon. In a unanimous decision on July 26, the Financial Accounting Standards Board (“FASB”) agreed to finalize a small change to U.S. GAAP that would help companies account for transactions in collaborative arrangements as revenue. The FASB hopes the update will help companies follow the revenue guidance under Accounting Standards Codification (“ASC”) 606, Revenue From Contracts With Customers.

Likely to be issued before year’s end, the update will reflect guidance under Proposed Accounting Standards Update (“ASU”) No. 2018-240, Collaborative Arrangements (Topic 808): Targeted Improvement. The proposal calls for certain transactions between joint venture partners to be accounted for as revenue. The arrangements create revenue when a participant is considered a customer. According to the FASB, companies should apply the guidance under ASC 606 in such situations.

In comment letters to the FASB, however, several audit firm and organizations said Proposed ASU No. 2018-240 resolved one problem but would not address broader issues. For instance, FASB ASC 808, Collaborative Arrangements, does not offer complete recognition or measurement guidance. Respondents also said accounting for the arrangements is usually based on a comparison to other accounting literature or an accounting policy choice. In response, the board acknowledged that nonrevenue transactions must be evaluated to conclude whether they are within the scope of other accounting literature. If they are not, a consistent accounting policy must be created. The FASB also said that questions would likely persist after the update to ASC 808 is finalized, but it is not ready to undertake a more massive project.

Public companies will have to apply the new guidance for fiscal years, and interim periods within those years, beginning after December 15, 2019. Private companies would receive an extra year to apply the update. Companies can adopt the new guidance early if they use ASC 606.