BSAD161: Intermediate Accounting I to: | Susan B. Hughes | from: | Bryan Bathalon | subject: | Research Case 12-4 | date: | February 10, 2014 | | |
Hemo-Tech Inc. and Extract Co have recently entered into a contractual arrangement over the manufacturing and shipment of product BIO-7, equipment used in the extraction and storing of patients’ blood samples. A clearly defined list of equipment and services have been constructed and documented, serving as a foundation in the agreement between the two organizations. The pertinent question regarding the arrangement between Hemo-Tech Inc. and Extract is whether or not Hemo has identified all of the potential deliverables in this arrangement. After carefully examining the contractual arrangement I have come to the conclusion that Hemo has not correctly identified all of its potential deliverables.
At the end of the agreement for part one Hemo states that they adopted the FASB Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements, in the submission of its engagements with Extract Co. This is noteworthy because currently, Hemo has identified the deliverables as five units of equipment, 50 boxes of equipment supplies, installation of the product, one-year monitor and test services, and three-years of report services. I believe each of these is correctly identified. However, I have determined that there are three more potential deliverables that need to be included as well. These are the technological improvements in Article 3, and both the warranty and safety representations listed in Article 4 of the contractual arrangement.
To determine whether an item is a deliverable I used the FASB Accounting Standards Update (ASU) as a reference in my research. In ASU 605-25-15-2 deliverables are referred to as “products, services, or rights to use assets”. Technological improvements, warranties, and safety representations can each be considered a service that would be provided based off of this classification. Therefore, these can be categorized as deliverables that Hemo-Tech should recognize. To further support my case, another section of the FASB, ASU 605-25-05-2, Revenue Recognition: Multiple-Element Arrangements, addresses and gives a general overview of arrangements that involve multiple elements or deliverables. This section states that, “To meet their customers' needs, vendors often provide multiple products, services, rights to use assets, or any combination thereof. These vendors transfer the deliverables to the customer and performance may occur at different times or over different periods of time, and the customer’s payments for these deliverables may be fixed, variable, or a combination of fixed and variable.” An important point to note from this is that deliverables may occur at different times or different periods of times. This is relevant because even though Hemo states that it doesn’t have any plans to upgrade or make any safety improvements to the equipment. They still need to recognize the potential that it may be needed. Especially considering the fact that the text mentions that historically safety standards are modified every two to three years, and Hemo is required to provide safety representation for Extract for the next three years as a part of the agreement. As a result, these other three requirements of the arrangement, (technological improvements, warranty, and safety representation) need to be considered deliverables as well.