SolvGen Inc. is a pharmaceutical development company that provides research and instrument systems. With SolvGen Inc main deliverables being research and launches of their instrument systems the best method for revenue recognition would be the milestone method.
WHAT IS MILESTONE METHOD
The milestone method for revenue recognition is primarily used for the research and developmental industry. When using the milestone method, companies record revenue when a phase of the research has been completed or an important result has been achieved, i.e. completing the research or having the development deliverables completed. These phases and deliverable are also known as a substantive milestone. According to FASB the following criteria must be met before a company is able to label a deliverable as a substantive milestone:
• “The milestone consideration must be proportionate with 1) the vendor’s performance to achieve the milestone or 2) the delivered item’s enhanced value resulting from the specific outcome of the vendor’s performance to achieve the milestone.
• The milestone consideration must be related solely to the vendor’s past performance.
• The milestone consideration must be reasonable relative to all deliverables and payment terms in the arrangement”
Once the company has set the milestones it will recognize the revenue in the period that the milestone is achieved.
MILESTONE RECOGNITION and DELIVERABLES
The deliverables for SolvGen Inc that compromise to make the milestones are the research phase and the completion/launch of the instrument systems. Since SolvGen is launching different versions of their instrument systems, there are multiple milestones that the company will account for.
With the project going on for five years the milestone are set by when the phases have been accomplished and the instrument systems have been launched.