EITF 07-01 Accounting for Collaborative Arrangements

Mar 14th 2008
Share this content
By Linda Cavanaugh, CPA - EITF 07-01 “Accounting for Collaborative Arrangements” was ratified by the FASB Board on December 12, 2007 and is effective for fiscal years starting after December 15, 2008.

EITF 07-01 defines a collaborative arrangement as a contractual arrangement that involves a joint operating activity. These arrangements involve multiple entities that are active participants and are exposed to significant risks and rewards depending on the commercial success of the activity. The arrangement does not have to involve the creation of a new legal entity and are often used in intellectual property development (such as R&D or movies).

To determine if a business relationship is a collaborative arrangement, you must decide if all parties are active participants and share in the risk and rewards of the operation.

EITF 07-01 gives examples of active participation as:

1. directing and carrying out the activities of the joint operating activity
2. participating on a steering committee or other oversight or governance mechanism
3. holding a contractual or other legal right to the underlying intellectual property.

EITF 07-01 also gives examples of terms and conditions that indicate that participants are not exposed to significant risks and rewards as:

1. services being performed in exchange for fees paid at market rates,
2. ability to exit the arrangement without cause and recover all or a significant portion of its cumulative economic participation to date
3. there is a limit on the reward that accrues to a participant.

If your business relationship is a collaborative arrangement then transactions with third parties should be reported in each partner’s respective income statement using the guidance in EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent.”

Transactions with other participants in the collaborative arrangement should be accounted for using relevant provisions of the applicable GAAP. For example, transactions involving inventory should be accounted for using ARB 41 as a guide. If the transactions are not within the scope of any existing GAAP, then the accounting should be based on an analogy to existing GAAP or a reasonable, rational and consistent policy.

Each participant should disclose information about the nature and purpose of its collaborative arrangements, its rights and obligations under the arrangement, the accounting policy in accordance with Opinion 22, and the income statement classification and amounts attributable to transactions with partners.

Chances are you are already following the guidance in this EITF, but the FASB felt that clarification was needed concerning the appropriate income statement presentation and classification of these activities as well as the sufficiency of the disclosures relating to collaborative arrangements.

Have Fun!
Linda Cavanaugh


Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.