Actg 351

ACTG 351 Case 1

Q1:

        Yes, the company should recognize any revenue during the evaluation phase of the contract based on the following reasons:

As the term of 605-25-5 in the FASB Accounting Standards Codification, a delivered item should be treated as a separate unit of accounting and recorded separately if both of the criteria are met:

• “The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the context of a customer's ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s).” (605-25-5 in the FASB Codification)
• “If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor.” (605-25-5 in the FASB Codification)

        Accordingly, we decided to examine whether it is appropriate to treat the evaluation phase as a separate unit by the following steps:  

• We examine whether the evaluation phase has value to the customer on a standalone basis. First, the evaluation phase is sold by the Columbia On-Line Networks company separately from the option phase. Second, the customer could potentially resell the product or service in the primary or secondary market. Therefore the first criteria is met for our case.
• Because there is no return policy related to this evaluation phase, we don’t need to examine the second criteria listed above.

 Therefore, we concluded that the evaluation phase should be treated as a separate deliverable and the Company should recognize the revenue of the evaluation phase.

Q2:

        The first step is to determine whether the arrangement should be divided into separate units of accounting and if yes, how many units there are. According to codification 605-25-25-2 and 605-25-25-5, the Technology has a standalone value, which is estimated as $8,450,000 by calculating the basic costs incurred to develop the Technology and a reasonable profit margin, so that the first criteria is met and since there is no return relative to the Technology, we can determine the Technology as one of the units of accounting. For both hardware and hours of consultation are met the two criteria for the same reasons as Technology—having standalone values and having no return related. Therefore, we determine that there are three units of accounting and the consideration will be allocated among the three units of accounting.