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2.4 Identifying the customer
Publication date: 30 Nov 2023
us Revenue guide
The revenue standard defines a customer as follows.
Definition from ASC 606-10-20
Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration.
In simple terms, a customer is the party that purchases a reporting entity's goods or services. Identifying the customer is straightforward in many instances, but a careful analysis needs to be performed in other situations to confirm whether a customer relationship exists. For example, a contract with a counterparty to participate in an activity where both parties share in the risks and benefits of the activity (such as developing an asset) is unlikely to be in the scope of the revenue guidance because the counterparty is unlikely to meet the definition of a customer. An arrangement where, in substance, the reporting entity is selling a good or service is likely in the scope of the revenue standard, even if it is termed a “collaboration” or something similar.
The revenue standard applies to all contracts, including transactions with collaborators or partners, if they are a transaction with a customer. All of the relationships in a collaboration or partnership agreement must be understood to identify whether all or a portion of the contract is, in substance, a contract with a customer. A portion of the contract might be the sharing of risks and benefits of an activity, which is outside the scope of the revenue standard. Other portions of the contract might be for the sale of goods or services from one reporting entity to the other and therefore in the scope of the revenue standard.
Example RR 2-2 illustrates the consideration of whether the revenue standard applies to a collaborative arrangement.
EXAMPLE RR 2-2
Identifying the customer – collaborative arrangement
Biotech signs an agreement with Pharma to share equally in the development of a specific drug candidate.
Is the arrangement in the scope of the revenue standard?
Analysis
It depends. It is unlikely that the arrangement is in the scope of the revenue standard if the reporting entities will simply work together to develop the drug. It is likely in the scope of the revenue standard if the substance of the arrangement is that Biotech is selling its compound to Pharma and/or providing research and development services to Pharma, if those activities are part of Biotech's ordinary activities.
Reporting entities should consider whether other applicable guidance (such as ASC 808) exists that should be applied when an arrangement is a collaboration rather than a contract with a customer.
2.4.1 Collaborative arrangements
ASC 808 defines a “collaborative arrangement” and provides guidance for the income statement presentation, classification, and disclosures related to collaborative arrangements. The guidance also provides several examples of the accounting by parties to a collaborative arrangement.
As discussed in ASC 808-10-15-5A, a collaborative arrangement could be partially within the scope of ASC 606. If a part of the arrangement is potentially a transaction with a customer, management should apply the guidance in ASC 606 to identify all distinct goods and services (refer to RR 3.4). This is only for purposes of assessing whether there is a unit of account that should be accounted for under ASC 606. Assessing whether the various activities in a collaborative arrangement are distinct could require significant judgment, particularly when all of the activities have some level of interdependence. Management then needs to assess whether all or part of each unit of account is a transaction with a customer.
- If the entire unit of account is a transaction with a customer, the reporting entity will apply ASC 606 to that unit of account, including all recognition, measurement, presentation, and disclosure requirements.
- If a unit of account is not a transaction with a customer in its entirety, that unit of account is not in the scope of ASC 606. This would be the case if, for example, the other party is not obtaining goods or services that are the output of the reporting entity’s ordinary activities for some aspect of the single unit of account. In this circumstance, a reporting entity can apply (1) elements of the accounting under ASC 606, (2) other relevant guidance by analogy, or (3) a reasonable accounting policy if there is no appropriate analogy. Management should consider the nature of the arrangement and its business operations to determine the appropriate accounting for portions of a collaborative arrangement outside the scope of ASC 606.
Figure RR 2-2 illustrates the assessment of which US GAAP guidance to apply to a collaborative arrangement.
Figure RR 2-2
Accounting for a collaborative arrangement
Accounting for a collaborative arrangement
View image
Refer to FSP 3.6.6 for the disclosure requirements related to collaborative arrangements.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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