Mini-Case based from "Accounting for the Public Interest: A Revenue Recognition Dilemma"

Arline Savage, Douglas C. Cerf, and Roberta A. Barra

Background

"You are a newly promoted audit manager at a national CPA firm with international affiliates, and you are very excited about being part of the audit team of a major client of the firm: a large pharmaceutical corporation that participates in the U.S. government's Vaccine for Children Program (VCP). The VCP purchases its federal stockpile of pediatric vaccines from only a small, select group of major pharmaceutical companies deemed eligible to participate in this program. This vaccine stockpile is a strategic reserve in which vaccine makers maintain a six month supply. Your appointment to this audit team bodes well for your long-term goal of becoming a partner at the firm." p. 691

"As part of your audit planning, you begin by reviewing U.S. generally accepted accounting principles (GAAP) revenue recognition concepts and criteria, followed by transaction-specific guidance that directly relates to pharmaceutical companies' vaccine stockpiles, which are classified as bill-and-hold sales. You know that a bill-and-hold sale is a sale in which the buyer purchases products and requests that the seller hold the product to be delivered upon request at a future time. The seller can charge the buyer an inventory carrying cost. Sometimes, the buyer pays for the product before it is shipped, such as the VCP in which your client participates. The government prepays for the stockpiled vaccines, which are stored by the vaccine companies in their warehouses and are not delivered until the governmentin this case, the Centers for Disease Control (CDC) request delivery. The vaccine makers are also required to rotate the inventory as the vaccines expire." p. 692

Instructions:

1. Prepare memo that addresses the below question. Please use the guidelines described in chapter 4 when you structure the memo.
2. Does the transaction described above qualify as a bill-and-hold sale under ASC 606? Why or Why not? Support your answer from authoritative sources. You may also include non-authoritative sources to support your conclusions.

• Facts/Background:State the relevant facts surrounding the issue
• Questions (issues):List the researchable questions you are trying to answer.
• Analysis:Include all relevant authoritative guidance along with analysis of how the guidance applies to your fact pattern.
• Conclusion:Sate your conclusion based on your research, highlighting key factors considered. Provide more detail for highly judgmental issues.
• Financial Statement and Disclosure Impacts:Summarize financial statement accounts affected and any disclosures required. Include journal entries when possible.