Multiple Deliverable Arrangements Codification

FASB Codification Pre-Case Multiple Deliverable Arrangements (MDAs) are agreements through which a vendor will offer several deliverables to a customer. Generally, businesses (regardless of their sizes) provide a wide range of products and/or services to their customers. In the process of providing products and/or services, business organizations negotiate with a single customer. The end product of these negotiations is a contractually binding agreement with multiple deliverables.

Given that such agreements generate challenging revenue recognition concerns, the Financial Accounting Standards Board has established standards for Multiple Deliverable Arrangements in ASC 605-25. This codification section provides guidelines for transaction-specific revenue recognition and specific issues associated with activities that generate revenues. The items covered by this topic as Multiple Deliverable Arrangements are products, services or permission for asset utilization agreed upon by the vendor and customer either orally or written. This applies to all industries in which a vendor will perform several activities that are geared towards revenue generation.

Therefore, items covered by revenue recognition as multiple deliverable arrangements are products, services or authorization to use assets for revenue-generating activities (Financial Accounting Standards Board, 2014). On the contrary, there are other items that are not covered by revenue recognition as multiple-deliverable agreements. These items include free or discounted products and/or services that will be provided at a future date upon completion of certain revenue transactions with the vendor or for being the vendor's customer for a pre-determined period of time.

While the products or services will be delivered either by the vendor or an unrelated entity, the customer should meet the cumulative level of transactions required by the vendor or be his/her customer for a stated period. Secondly, a refund or rebate of a specific amount if the customer meets the required cumulative level of transactions or is the vendor's customers for a specified period of time is not covered as an MDA as stated in ASC 605-25-15-2A.

Third, revenue recognition does not cover research or development payment deliverables based on the milestone method in ASC 605-28 as MDAs (Financial Accounting Standards Board, 2014). Finally, the sale of award credits through widespread loyalty programs are not covered as Multiple Deliverable Arrangements. The Financial Accounting Standards Board has provided criteria for consideration as a separate unit of account in section 605-25-25-5. The criteria help in determining whether to separate multiple deliverables in an agreement into separate unit of accounting.

The first requirement is that the provided item must have a stand-alone value. In this case, delivered items are considered to have value on a stand-alone basis if they can be resold by the customer or are sold separately by another vendor. Secondly, an item can be considered a separate unit of accounting if its delivery or performance is significantly controlled by the vendor. This is especially in situations where an agreement includes a general right of return based on the delivered item.

Based on the first requirement for an item to be considered as a separate unit of accounting, two goods or services sold at two different times automatically qualify as separate units of accounting. The two goods or services will automatically qualify as separate units of accounting in such.