ASU 2010-17 updates FASC 605 – Revenue Recognition and is effective for fiscal years beginning on or after June 15, 2010. This ASU adds a subtopic to FASC 605 concerning revenue recognition related to research and development projects. It clarifies that revenue can be recognized when a milestone is achieved if the milestone meets all criteria to be considered substantive.
A definition of a Milestone was added to the Codification Glossary:
An event having all of the following characteristics: there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved; the event can only be achieved based in whole or in part on either the vendor’s performance or a specific outcome resulting from the vendor’s performance; and if achieved, the event would result in additional payments being due to the vendor.
A milestone does not include events for which the occurrence is either contingent solely upon the passage of time or the result of a counter-party’s performance.
For a milestone to be substantive it must meet the following criteria:
1. The consideration being earned should be commensurate with either the vendor’s performance to achieve the milestone or the enhancement of the value of the item delivered as a result of the vendor’s performance,
2. Should be related solely to past performance,
3. Be reasonable relative to all deliverables and payment terms in the arrangement, and
4. Should be considered in its entirety and can not be bifurcated.
The decision to use the Milestone Method is a policy election and any of the other proportional revenue recognition methods could be applied.
The following disclosures concerning the Milestone Method should be made each reporting period:
1. A description of the overall arrangement,
2. A description of each milestone and related contingent consideration,
3. A determination of whether each milestone is considered substantive,
4. The factors that the entity considered in determining whether the milestone or milestones are substantive, and
5. The amount of consideration recognized during the period for the milestone or milestones.