research and development arrangement

ASC 605-28 formerly provided the "milestone method" of revenue recognition, an accounting policy election that allowed a vendor in a research-and-development arrangement to recognize contingent milestone consideration in its entirety in the period the milestone was achieved, if the milestone was deemed substantive. Every paragraph of this subtopic — scope, recognition, disclosure, and transition — was superseded by ASU 2014-09 (Revenue from Contracts with Customers). Milestone-type contingent consideration is now accounted for as variable consideration under ASC 606, subject to the constraint on variable consideration.

ASC 730-20 governs how an entity accounts for arrangements in which other parties (often a limited partnership of investors) fund the entity's research and development. The central question is the substance of the entity's obligation: whether the entity has merely contracted to perform R&D services for others, or has in substance incurred a liability to repay the funding parties. Substance governs over form, so payments labeled royalties or option/purchase prices may in fact be settlement of a borrowing, the purchase price of an asset, or true royalties.

ASC 810-30 tells a sponsor how to account for a research and development arrangement in which the sponsor funds 100% of the R&D activities — typically by capitalizing a new entity (Newco) with cash and technology rights, spinning off Newco's Class A common stock to the sponsor's shareholders, and retaining a purchase option and nominal Class B shares. The sponsor reclassifies the contributed cash as restricted cash, recognizes R&D expense as the activities are performed, and records the Class A distribution as a dividend at the fair value of that stock. The Class A stock is presented as noncontrolling interest classified in equity but separate from the parent's equity, and exercise of the purchase option is accounted for like an acquisition of a noncontrolling interest.