New EITF revenue recognition standards for multiple deliverable arrangements.

• Author: Turgeon, Christine M.
• Position: Financial Accounting Standards Board's Emerging Issues Task Force

The Financial Accounting Standards Board's Emerging Issues Task Force (EITF) recently updated guidance regarding recognition of revenue for multiple deliverable arrangements, which is intended to better reflect the underlying economics of such arrangements. In most situations, the new guidance will result in earlier revenue recognition for financial reporting purposes.

As a result, taxpayers that for tax purposes follow their financial accounting revenue recognition method for multiple deliverable arrangements could face a change in method of accounting that would require IRS consent. Similarly, taxpayers that defer advance payments related to multiple deliverable arrangements under Rev. Proc. 2004-34 should file a request to change their accounting method if their underlying method of recognizing those advance payments for financial reporting purposes changes due to the adoption of the new revenue recognition guidance.

The new EITF guidance is expected to have a significant impact on industries that have multiple deliverable arrangements, including the software, technology, pharmaceutical, and biotechnology sectors.

New Financial Accounting Guidance

Vendors often provide multiple deliverables to their customers as part of a single arrangement or contract. Special accounting rules govern recognition of revenue from such arrangements due to the difficulty of determining value for each separate deliverable. The EITF has issued EITF Issue No. 08-1, "Revenue Arrangements with Multiple Deliverables" (superseding EITF Issue No. 00-21), and EITF Issue No. 09-3, "Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Include SoftwareElements" (modifying the scope of AICPA Statement of Position (SOP) 97-2). Both EITF issues are effective for new or materially modified contracts in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The new revenue recognition guidance has been incorporated in ASC 605-25, "Revenue Recognition--Multiple Element Arrangements," and ASC 985, "Software."

EITF Issue No. 08-1

Under EITF Issue No. 00-21, companies generally had been required to recognize revenue from multiple deliverable arrangements on a single unit of accounting basis absent vendor-specific objective evidence (VSOE) or third-party evidence (formerly known as vendor objective evidence) of the fair value of the undelivered items. As a single unit of accounting, revenue generally was recognized using a...