...Research and Development and License and Distribution Agreements SolvGen Inc. (SolvGen), a Pharmaceutical development company has entered a research and development contract with Careway Pharma Inc. (Careway) lasting 5 years. According to the agreement, SolvGen is to commercially sell Careway’s recently built instrument systems to customers. They have received milestone payments from Careway during the past year. However, according to the Securities and Exchange Commission (SEC), these payments need to be accurately accounted for in conformity with the SEC’s regulations and rules. With regards to the deliverables for the arrangements, there are a few different deliverables described. The first is the research and development agreement between SolvGen and Careway. The second is the license and distribution agreement between SolvGen and Careway. These agreements are both written contractually binding arrangements that are within the field of multiple element arrangements. This is a multiple element arrangement due to the fact that it is a research and development program and is stretched over a long period of time. However, this does not apply to the nonrefundable milestone payments from Careway, because they are payments relating to research and development deliverables that are accounted for under the milestone method of revenue recognition. (SAB 101) The milestone payments received to date by SolvGen should be recognized as revenue over the expected period of the...
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...Case 10-1 SolvGen Inc. In this case study, we deal with two separate agreements between SolvGen and Careway Pharma that are being audited for the possible sale of SolvGen to Direct Drugs, Inc. First, is the research and development agreement between SolvGen and Careway. And second, is the license and distribution agreement between the aforementioned. These agreements are both written and contractually binding and are within the scope of Multiple Deliverable Arrangements. The deliverables for the arrangements described in the case study are: a five-year research and development agreement and a five-year license and distribution agreement. For the five-year research and development agreement, SolvGen would use its best efforts to further develop proprietary instrument systems that have been under development for nearly 18 months and are expected to be ready for commercial launch in the near future. Under the license and distribution agreement, SolvGen will be paid for proprietary instrument system as it is purchased by Careway. The exclusive negotiation payment - $ 1million (paid in December 1, 2005) cannot be recognized in 2005 because it is not yet earned. The contract will start in 2006 that’s when the amount will start being spread over the 5 year life contract. SolvGen can only recognize $ 200,000 in 2006. The contract signing payment - $ 2 million (paid January 1, 2006) can be recognized over 5 year life of contract because even though they are nonrefundable milestone...
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...SolvGen Inc. entered into a five-year research and development agreement with Careway Pharma Inc. In connection with executing the research and development arrangement, SolvGen and Careway also entered into a five-year license and distribution agreement. Under the terms of the research and development agreement, SolvGen retains all intellectual rights to the results and is entitled to the following five nonrefundable milestone payments from Careway: 1. Exclusive negotiation payment — $1 million (paid December 1, 2005). 2. Contract signing payment — $2 million (paid January 1, 2006). 3. Commercial launch of instrument system Version 1 — $5 million (paid March 31, 2006, upon commercial launch of the instrument system). 4. Commercial launch of instrument system Version 2 — $5 million (not yet paid). 5. Commercial launch of instrument system Version 3 — $5 million (not yet paid). Under the license and distribution agreement, Careway will have the right to market and distribute the proprietary instrument systems. Careway is required to pay SolvGen for each proprietary instrument system as it is purchased by Careway. SolvGen recognizes the nonrefundable milestone payments when the payments are received over the remaining estimated contractual life of the agreements. Based on an evaluation of the circumstances, there are two deliverables in this arrangement that should be considered for separation: a. A license and distribution deliverable b. A research...
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...Case 10-1 SolvGen Inc. In this case study, we deal with two separate agreements between SolvGen and Careway Pharma that are being audited for the possible sale of SolvGen to Direct Drugs, Inc. First, is the research and development agreement between SolvGen and Careway. And second, is the license and distribution agreement between the aforementioned. These agreements are both written and contractually binding and are within the scope of Multiple Deliverable Arrangements. The deliverables for the arrangements described in the case study are: a five-year research and development agreement and a five-year license and distribution agreement. For the five-year research and development agreement, SolvGen would use its best efforts to further develop proprietary instrument systems that have been under development for nearly 18 months and are expected to be ready for commercial launch in the near future. Under the license and distribution agreement, SolvGen will be paid for proprietary instrument system as it is purchased by Careway. The exclusive negotiation payment - $ 1million (paid in December 1, 2005) cannot be recognized in 2005 because it is not yet earned. The contract will start in 2006 that’s when the amount will start being spread over the 5 year life contract. SolvGen can only recognize $ 200,000 in 2006. The contract signing payment - $ 2 million (paid January 1, 2006) can be recognized over 5 year life of contract because even though they are nonrefundable milestone...
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...handled, ASC 605 talks about accounting for warranties. It states that “sellers of extended warranty or product maintenance contract have an obligation to the buyer to perform services throughout the period of the contract.” Basically this means that revenue should be recognized proportionately over the length of the warranty obligation. In my opinion Crazy Computers is the primary obligor and because of this the recognition of revenue should be deferred and recognized appropriately over the period of obligation. SolvGen Inc. This case discusses the company Direct Drugs Inc. and their plans to acquire SolvGen Inc. SolvGen Inc. has two material agreements with Careway Pharma Inc. One of the case requirements asks what the deliverables for the arrangement described in the case study were. These being the research and development agreement and a license and distribution agreement. The next requirement asked when the milestone payments received to date by SolvGen were to be recognized as revenue. The nonrefundable milestones include an exclusive negotiation payment of $1 million dollars...
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...Case 10-1 SolvGen Inc. Direct Drugs Inc. (Direct) is planning to acquire SolvGen Inc. (SolvGen or the Company), a publicly owned company, during the fourth quarter of fiscal year ending December 31, 2010. Direct has engaged our audit engagement team to perform due diligence procedures, with an emphasis on the review of two separate material agreements: (1) a research and development agreement and (2) a license and distribution agreement, both executed by SolvGen during the first quarter of fiscal year 2010. Direct’s management provided the engagement team with the following memo describing the Company’s revenue recognition policy: MEMO To: Audit Engagement Team From: CFO, SolvGen Inc. Subject: Revenue Recognition for Research and Development and License and Distribution Agreements Date: November 30, 2010 SolvGen Inc. (the Company), an SEC registrant, is a pharmaceutical development company. SolvGen entered into a five-year research and development agreement with Careway Pharma Inc. (Careway) on January 1, 2010. The research and development agreement calls for SolvGen to use its best efforts to further develop proprietary instrument systems that have been under development for nearly 18 months and are expected to be ready for commercial launch in the near future. In connection with executing the research and development arrangement, SolvGen and Careway also entered into a five-year license and distribution agreement dated January 1, 2010. Under the terms of the research and...
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...contract in proportion to the amount of insurance protection provided. That generally results in premiums being recognized as revenue over the contract period.” Using guidance provided by this standard, Crazy Computers is recognizing revenue incorrectly by offsetting revenue with the amount they are paying to the third-party insurers. To recognize revenue correctly, Crazy Computers would recognize the revenue generated by the sale of a computer at the point of sale, but recognize the insurance premiums over the length of the contract. Therefore, no offsetting of revenue would take place. SolvGen Inc. SolvGen Inc. is a publicly owned company that is potentially being acquired by Direct Drugs Inc., pending due diligence procedures. SolvGen has recently entered into a five year research and development agreement, along with a license and distribution agreement, with Careway Pharma Inc. SolvGen is entitled...
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...1. According to the case, I think the big problem is the revenue recognition date. 2. Alternative 1, exclusive negotiation payment ($1 million) should be recognized on December 1, 2009 because it paid on that day. Contract signing payment ($2 million) should be recognized on January 1, 2010 because SolvGen and Careway also entered into a five-year license and distribution agreement dated January 1, 2010. Instrument system Version 1 ($5 million) should be recognized when of instrument system Version 1 is ready for commercial launch. Instrument system Version 2 &3 ($5 million) also should be recognized when of instrument system Version 2 &3 is ready for commercial launch. Alternative 2, exclusive negotiation payment ($1 million) should be recognized over the five-year research and development agreement term, beginning with the date the R&D services begin. Contract signing payment ($2 million) should be recognized over the five-year research and development agreement term, beginning with the date the R&D services begin. Instrument system Version 1 ($5 million) should be recognized over the performance period. Instrument system Version 2 &3 ($5 million) should be recognized in their entirety upon achievement of each milestone. 3. Research 1, ASC 605-28 notes that it "specifies the accounting for research or development deliverables or units of accounting that include milestones that are accounted for under the milestone method of revenue recognition...
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...“deliverable” did not have a clear definition, there are lots of potential deliverables that entities may considering. We can find that in the case 10-1 SolvGen Inc., the selling of proprietary instrument systems, which is under the five-year license and distribution agreement, is a deliverable. From the case we know that Careway will have the right to market and distribute the proprietary instrument systems and pay SolvGen for each proprietary instrument system in the future. The five-year license and distribution agreement requires Careway to pay SolvGen for each proprietary instrument system when it is purchased by Careway. A deliverable must have objective value on a stand-alone basis. The five-year research and development agreement doesn't have a deliverable because it's integrated with the five-year license and distribution agreement and doesn't have a stand-alone value. According to FASB ASC 605-25, it's not a deliverable. 2. According to FASB Statement of Financial Accounting Concepts(CON) 5,Recognition and Meaurement in Financial Statements of Business Enterprises, revenue is considered “earned” if an entity has substantially accomplished what it must do to be entitled to the contractual benefits. Revenue is “realizable” when related assets received are readily convertible to cash or claims to cash. In this case, SolvGen should recognize the nonrefundable milestone payments as revenue when Careway launches the proprietary instrument systems, because the launch date...
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