EITF Issue No. 00-21 Revenue Arrangements with Multiple Deliverables (MDAs)

1. EITF Issue No. 00-21Revenue Arrangements with Multiple Deliverables (MDAs)

2. ISSUE Many companies offer multiple solutions to their customers' needs. Those solutions may involve the delivery or performance of multiple (bundled) products, services, or rights to use assets, andperformance may occur at different points in time or over different periods of time. Example: Text-book package at the bookstore (MDA) Kieso Text + Wiley Plus

3. PROBLEM?? The prices assigned to the various elements of a particular transaction on the seller’s invoice are not always indicative of the actualearning of revenueon the various elements of these transactions. Example: Kieso Text + Wiley Plus $200 + $100 = $300 =>FMV $180 + $60 = $240 =>Bundle Price ** $220 + $20 = $240 => Invoice Price EITF issue 00-21:=> Price assignment should be based on Relative FMV => Multiple units of accounting

4. Numeric Example X Co. sells an mp3 player, which it calls the Liepod. X Co. prefers to sell the Liepod with a bundled annual service package, which sells for $320. The contract has no general right of return provisions.X Co. is sufficiently capitalized, experienced, and profitable business and has no reason to believe that the one-year service requirement will not be met. On its invoice, X Co. has assigned $260 to the Leipodand $60 to the service package.Without the service package, the Liepod retails for $250, and X Co. sells the servicing package separately for $120per year. Question:How much revenue X Co. can recognize on the day it sells the bundled package?

5. Numeric Example Answer: X Co. should split apart the two revenue elements of the bundled package by: -allocating revenue to the Liepod, based on the fair values of the Liepod and its service package, which it calculates as follows: $250 product price x $320 bundled price = $216.22 $250 product price + $120 servicing price -X Co. should also allocate revenue to the service package in the same manner with the following calculation: $120 servicing price x $320 bundled price = $103.78 $250 product price + $120 servicing price

6. Numeric Example Based on these calculations:-X Co. can recognize $216.22 of revenue every time it sells the bundled Liepod + Service package. -However, because X Co. must provide one year of service under the support package, the remaining $103.78 of revenue associated with the servicing contract can only be incrementally recognized on a monthly basis over the 12-month life of the service contract, which is $8.65 per month. Question:How much revenue X Co. can recognize on the day it sells the bundled package? January 1st, 20xx: $216.22 January 31st, 20xx: $224.87 December 31st, 20xx: $320.00

7. Numeric Example CONTINGENCY ISSUE:Given the fact that Revenue Recognition from the service pack is contingentupon the company’s ability to provide such services in the future, HOW MUCH REVENUE CAN BE RECOGNIZED FROM THE SALE ANE DELIVERY OF LEIPOD?? Without the service package, the Liepod retails for $250, and X Co. sells the servicing package separately for $120per year. Allocation: Liepod: $216.22 Svc. Pkg: $103.78

8. Numeric Example • CONTINGENCY ISSUE: • Given the fact that Revenue Recognition from the service pack is contingentupon the company’s ability to provide such services in the future, HOW MUCH REVENUE CAN BE RECOGNIZED FROM THE SALE ANE DELIVERY OF LEIPOD?? • $200 for the Leipod=> $120 for the Service Pack • January 1st, 20xx: $200January 31st, 20xx: $210December 31st, 20xx: $320

9. EITF 00-21 EITF 00-21 provide guidance on the following: •How a vendor determines whether an MDAconsists of a singleunit of accounting or multipleunits of accounting.•How to allocate MDA consideration to multiple units of accounting => Relative FMV •Measuring MDA consideration => Revenue recognition Criteria

10. EITF 00-21 EITF 00-21 set forth three basic principles1. MDAs are divided into separate units of accountingif the deliverables included in the arrangement meetsall three of the criteria presented below. 2. Subject to certain limits regarding contingent amounts to be received under the MDA, relative fair valuesare used to allocate MDA proceeds to the separate units of accounting. 3. The revenue recognition criteriato be applied are determined separately for each unit of accounting.

11. EITF 00-21 Three criteria for Separate Unit of Accounting In an arrangement with multiple deliverables, the delivered item(s) should be considered a separate unit of accounting if all of the following criteria are met: a. The delivered item(s) has value to the customer on a standalone basis. That item(s) has value on a standalone basis if it is sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. b. There is objective and reliable evidence of the fair (market) value of the undelivered item(s). c. If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) isconsidered probable and substantially in the control of the vendor.

12. EITF 00-21 -Refer to the flowchart in Exhibit 00-21A for an illustration of the above criteria. -Fair Value evidence VSOE of Fair value is preferable. VSOE: Vendor-specific (or entity specific) objective evidence.The best evidence of fair value is VSOE of the sales price of the deliverable on a stand-alone basis. -Excluded from the scope of the EITF 00-21 are the following: Refer to EITF 00-21 -Multiple Deliverable Disclosures: Refer to EITF 00-21