The original ‘milestones’ in ancient times often had no markings of distance or location on them. Today, we use the term in contractual agreements of various sorts, often with very detailed definitions of what it means to reach a milestone. Research and development projects often include required milestones that must be met; until recently, the existing guidance was subject to interpretation. The Financial Accounting Standards Board (FASB) has recently issued guidance as it relates to recognizing revenue that is tied to achieving a milestone – Topic 605. The guidance first defines the term ‘milestone’ and then moves through the details of revenue recognition. We will refer to the entity attempting to reach a milestone as a ‘vendor.’
So what is a milestone, for our purposes? A milestone has four characteristics:
1. an uncertainty of its being achieved, even if the vendor fully expects to achieve it
2. a reliance on the vendor’s performance, either directly or indirectly
3. a result of additional payments being due the vendor
4. a substantive event
The last item gets its own definition in the guidance. We will focus on one piece of the definition of “a substantive event” – that the milestone event be completed in full.
By way of example: Meds R Us has an R&D project where it earns its grant funding through meeting certain milestones. Phase I of the project calls for the production of 1,000 non-defect capsules of their new drug. At the end of May, Meds R Us has produced 999 such capsules. Under this method of revenue recognition, no revenue would be recognized in May. However, the single non-defect capsule produced in June will result in grant revenue recognition attributable to that milestone.
If your business model relies on contracts tied to milestones, you should consider researching the impact on your business of adopting this form of revenue recognition.
Click here for more information on Skoda Minotti’s Biotechnology industry group or call Paul Etzler or Ken Haffey at 440-449-6800.