• NN Pharma, a pharmaceutical company in Iceland, owns and maintains a portfolio of patents related to an antibiotic that treats life-threatening diseases. On February 23, 20X8, NN grants BTX (a pharmaceutical company in Saudi Arabia) the exclusive right to use its patented drug formula to commercialize and supply the antibiotic in the MENA Region. The intellectual property (IP) is fully developed, and regulatory approval has been obtained; therefore, BTX is able to commercialize the IP. NN has determined that the patented drug formula is functional IP and that therefore, the license grants BTX the right to use the IP.

In exchange for the exclusive right to use the patented drug formula, BTX agrees to pay NN Pharm the following amounts:

1. An up-front fee of $300 million.
2. Annual fixed fees of $50 million payable at the end of each year in which

the contract is effective.

3. Sales-based royalties of 5 percent of BTX's sales of the antibiotic in Saudi Arabia (recognized in accordance with the sales-based royalty exception in ASC 606-10-55-65).

The contract states that BTX has the exclusive right to use the patented drug formula through the patent term, which expires in 10 years (i.e., the contract ends when the patent expires). The contract also states that BTX may terminate the contract before the expiration of the patent by providing three months' notice to NN Pharma. All amounts already paid by BTX are nonrefundable in the event of early termination. The contract does not include an explicit termination penalty (i.e., BTX is not required to pay additional cash consideration to NN Pharma upon early termination); however, upon early termination, the right to the patented drug formula in MENA would revert back to NN Pharma, which would be able to relicense the patented drug formula to a different pharmaceutical company in the MENA region. This alternative is only available to BTX and only if BTX terminates the contract before the end of the 10-year term.

Questions: (1) what is the contract period here? (2) how should BTX account for the upfront payment (it's a cost to BTX)? (3) how should NN Pharma account for the upfront payment (its revenue to NN)? How should NN account for the royalty payments (revenue)? And (5) how should NN account for the fixed annual payments (revenue)?

Excerpt from the Variable Consideration Rule (606-10-32-8 & 606-10-32-9):

An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled:

a. The expected value The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics.

b. The most likely amount The most likely amount is the single most likely amount in a range of possible consideration amounts (that is, the single most likely outcome of the contract). The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not).

An entity shall apply one method consistently throughout the contract when estimating the effect of an uncertainty on an amount of variable consideration to which the entity will be entitled. In addition, an entity shall consider all the information (historical, current, and forecast) that is reasonably available to the entity and shall identify a reasonable number of possible consideration amounts. The information that an entity uses to estimate the amount of variable consideration typically would be similar to the information that the entity's management uses during the bid-and-proposal process and in establishing prices for promised goods or services.

Assignment:

YM Construction (YMC) enters into contracts with customers to construct commercial buildings with RUH Construction. The contracts include similar terms and conditions and contain a fixed fee plus variable consideration for a performance bonus related to the timing of YMC's completion of the

construction. Based on YMC's historical experience, the expected bonus amounts and associated probabilities for achieving each bonus are as follows:

Bonus amount Probability of outcome $ 10%

$ 100,000 60%

$ 150,000 30%

YMC determines that using the expected value method would better predict the amount of consideration to which it will be entitled because it has a large number of contracts that have characteristics that are similar to the new contract. Under the expected value method, what is the estimate that YMC considers to be variable consideration?

Estimating the transaction price using the most likely amount method

YMC enters into a six-month advertising campaign agreement ($500,000 fixed fee) that also includes a potential $100,000 performance bonus linked to certain goals. YMC estimates it is 80% likely to receive the entire performance bonus and 20% likely to receive none of the bonus. Under the most likely amount method, what is the estimate that YMC consider to be variable consideration?

BARTCO is required to stand ready to produce a part for a customer under a standby supply agreement. The customer is not obligated to purchase any parts (i.e., there is no minimum guaranteed volume); however, it is highly likely the customer will purchase parts because the part is required to manufacture the customer's product, and it is not practical for the customer to buy parts from multiple suppliers because of product specificity issues. In addition, the customer's current product design is relatively new.

Question: What is the performance obligation here? Is it (a) the standby supply agreement, (2) the issuance of a purchase order, (3) the production of the part or (4) delivery of the part? Why and why not?

TPO, an IP telephony company, offers various combinations of handsets and usage plans to its customers under two-year non-cancelable contracts. It offers two handset models: a basic model that it offers free of charge (stand-alone selling price is $150); and the most recent model, which offers additional features and functionalities and for which TPO charges $300 (stand-alone selling price is $600). The entity also offers two usage plans: a 500-minute plan and an 1000- minute plan. The 500-minute plan sells for $50 per month, and the 1000-minute plan sells for $70 per month (which also corresponds to the stand-alone selling price for each plan).

Assignment: Create a table showing the various revenue recognition possibilities.