To: John J. Morris, Department of Accounting
From: Group #1 (Anthony Smith, Jessica Kolb, Jeffrey Brownlee, Caleb Dykes)
Subject: ACCTG 642: Case 10-1, SolvGen Inc.
Statement of Relevant Facts
Direct Drugs Inc. (Direct) has created a plan for the acquisition of SolvGen Inc. (SolvGen), which is a publicly owned company. Direct has engaged an audit team to review agreement and procedures dealing with two separate material agreements. The first agreement is a research and development agreement and the second is a licensing and distribution agreement. The contract states that SolvGen entered into a five year research and development agreement with Careway Pharma Inc. on January 1, 2010. The agreement…show more content… 2. We believe that SolvGen should recognize the deliverable milestone payments as revenue upon the completion of the instrument systems and recognize the negotiation payment and the contract signing payment over the three commercial launches of the instrument systems as these are to be considered arrangement considerations. c. ASC 605-28-25-3 states that in order to “…recognize the milestone consideration in its entirety as revenue in the period in which the milestone is achieved, the milestone shall be substantive in its entirety.” iii. The three launch payments fit the before stated criteria of substantive payments. The contract signing payment and negotiation payment do fit the criteria because these payments are not proportionate to the vendor’s performance, do not relate solely to past performances, and are not “reasonable relative” to all of the deliverables and payment terms. d. ASC 605-25-30-1-2 states what an arrangement consideration is and how to account for these considerations. iv. Arrangement considerations must be fixed or determinable and are to be allocated at the “inception of the arrangement to all deliverables on the basis of their relative selling price.” v. This is applicable to our case because the negotiation and contract signing payments can be considered arrangement considerations because the payments are fixed and therefore, should be allocated over the three