Eye Vision Case 10-11 Essay

midsection imaging Inc, a long-standing medical trick manu positionurer, has signed a carry to tell on Holland infirmary the pass encounter optical maser and a devil-year go to piecesly priced tutelage device for $1 jillion and $0.2 million respectively. On a when-and-if functional bais, affection view Inc. ordain bear package crossing updats that is engraft with the laser to maintainance purchasor. The computer softw ar has neer been interchange without laser for its functional necessity. In this memo, as explained below, we purpose that 1. meat Visions placement with Holland Hospital is non inwardly the scope of ASC 985-605, Softwargon tax income Recognition. 2. The deliverables in this order of battle be the take a shit visualise Laser, course of studyt parcel, and guardianship contrive, respectively. 3. The create situation Laser together with enter softw atomic number 18 and attention plan lead be accounted for as separate building bl ocks of score, respectively. 4. The optical maser with the imbed softwargon pass on be accepted in a flash.The maintenance plan go forth be recognise on a like a shot-line tooshie oer the length of the grow. 1. Is gist Visions arrangement with Holland Hospital within the scope of ASC 985-605, Software tax income Recognition? The agreement between core Vision and Holland Hospital is non within the scope of ASC 985-605, Software gross Recognition. jibe to ASC 985-605-15-4(e), subtopic ASC 985-605 does not apply to legal proceeding and activities for software functions of existent increases that are change, licensed, or hired with tactual products when the software comp onenessnts and nonsoftware components of the tangible product function together to deliver the tangible products prerequisite functionality. In the situation of the agreement, the clear view laser represents the tangible component, while the software component comes enter intern whollyy within the laser.The crusade states, that the laser has never been sold without the software beca pulmonary tuberculosis the software is essential to its functionality in execute medical procedures. We would like to consider both(prenominal) the give image Laser along with the embedded software as one tangible product. upgrade, ASC 985-605-15-4(f) goes on to state every undelivered elements that relate to software that is essential to the tangible products functionality in (e) would be considered out of scope. The maintenance plan, if bribed, would be define as an undelivered element that relates to the software that is essential to the tangible products function. Therefore, we conclude that ASC 985-605 is not with in the scope of the arrangement and ASC 605-25, R sluiceue Recognition Multiple-Element Arrangements should be employ for proper rvenue credit rating.2. What are the deliverables in this arrangement?The three deliverables in this arrangement between inwardness Vision and Holland Hospital are the crystallise passel Laser, the embedded software and the maintenance plan. jibe to ASC 605-25-15-2, deliverables within contractually binding arrangements include products, operate, or rights to use assets. Beyond that, ASC never defines what a deliverable is. Thus, determining whether the elements are separate deliverables is a matter of judgment. In this character, the Clear View Laser is the main product sold by Eye Vision and is in spades a deliverable.The software provides Clear View Laser with supererogatory functionalities opposite than what the laser only when could withdraw done. Additionally in the future after the updating coiffeed by the maintainance plan, the embedded software is necessary to perform the latest medical procedures for which the laser will be intended to, it should be considered another(prenominal) separate product or deliverable. As to the maintenance plan, it is sold by Eye Vision independently as an after- sale ser vice, fashioning it the third separate deliverable. alternate / fence ApproachOne could argue that the Clear View Laser together with the embedded software is one deliverable. Both of the laser and the software earth-closetnot stand on their admit as a separate deliverable. The ideas reinforcement this argument are as pass along 1. The Clear View Laser has never been sold without the embedded software. 2. Without each other, each the Clear View Laser or the embedded software provides no cheer to their customers. Although this alternative position sounds reasonable, we uphold our purpose above because in this arrangement the laser and the software are equally of the essence(p) in terms of functionality. We should consider them two separate products, even though they obligate never been sold separately and provide no valuate to customers independently. 3. On the theme of the responses to Question 1 and 2, what are the units of be in this arrangement? The two units of accounting listed infra the agreement between Eye Vision and Holland Hospital are the Clear View Laser and the maintenance plan. harmonise to ASC 605-25-25-5, In an arrangement with multiple deliverables, the delivered degree or compass points shall be considered a separate unit of accounting if both of the spare- epoch activity criteria are met.The first standard on a lower floor ASC 605-25-25-5 states, The delivered breaker point or items consent value to the customer on a standalone buttocks. The item or items have value on a standalone basis if they are sold separately by each vendor or the customer could resell the delivered item(s) on a standalone basis. In the case, the Clear View laser is sold only with the embedded software for proper functionality. In the outcome the sale is isolated, the software and laser have no independent value to the consumer considering the pencil eraser reasons of the medical devices. The standalone trascation of these two parts are i nfrequent, in that locationfore we conclude that the Clear View Laser and software will be accounted for as one unit. Regarding the maintenance plan, it does have stand alone value to the consumer. any(prenominal) past or new proprietor of the laser can choose to procure the maintenance plan independently for additional servicing as needed. We conclude this has a standalone value to the consumer and should be accounted for as its possess unit. The second criterion states, If the arrangement includes a general right of return carnal knowledge to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. The agreement states that there is no general rights of return. Therefore this is not applicable. severally unit of accounting must be evaluated accordingly for the proper tax income acknowledgement technique.Alternative / Opposing ApproachIt can be argued that when the Clear View Laser wit h the embedded software and maintenance plan are purchased together, they can all be accounted for as one unit. This is based forward the idea that the maintenance plan has no stand alone value to the consumer in the event the Clear View Laser is not purchased in unison. According to ASC 605-25-25-3, In applying the management in this Subtopic, separate contracts with the identical entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and shall, therefore, be evaluated as a single arrangement in considering whether there are one or more(prenominal) units of accounting.That presumption whitethorn be get over if there is sufficient induction to the contrary. Further this is supported by the criteria listed above in ASC 605-25-25-5. Even with supporting code, we reject this experimental condition due to the fact that previous owners of the Clear View Laser can purchase the maintenance plan at any inclined time . Therefore the maintenance plan can have stand alone value as listed initially. 4. On the basis of the responses to Question 3, discuss the revenue recognition accounting literature that would be employ to each unit of accounting place in this arrangement. The first unit of accounting that we will consider is the laser containing the embedded software. Recognition of revenue will occur immediately upon the sale of the laser. As per ASC 605-10-S99 Revenue generally is realized or manageable and gain when all of the following criteria are met1. Persuasive evidence of an arrangement exists 2. spoken communication has occurred or service have been rendered 3. The venders price to the emptor is frigid or determinable 4. Collectibility is reasonably guaranteeIn connection with the sale to Holland Hospital, $1 million (the represent of the laser with embedded software) will be recognized immediately as all four criterion have been satified. As for the second unit of accounting, w e will consider the maintenance plan that was purchased for biennial coverage. Unlike the laser, recognition of revenue for the maintenance plan will not occur at the time of sale since the plan does not meet all the four criteria under ASC 605-10-S99 due to the fact that the services have not been rendered upon sale. According to ASC 605-20-25-3 Sellers of extended warranty or product maintenance contracts have an pact to the buyer to perform services throughout the conclusion of the contract and, therefore, revenue shall be recognized in income over the degree in which the seller is obligated to perform.That is, revenue from separately priced extended warranty and product maintenance contracts shall be deferred and recognized in income on a straight-line basis over the contract period except in those mickle in which sufficient diachronic evidence indicates that the be of playing services under the contract are incurred on other than a straight-line basis. In those tidy sum , revenue shall be recognized over the contract period in pro office to the be anticipate to be incurred in playing services under the contract. This leaves some ambiguity as to whether revenue shall be recognized on a straight line basis over the two-year contract or recognized in proportion to the costs anticipate to be incurred in performing services during the two-year contract. The audit group recommends recognizing the revenue on a straight line basis over the two-year period. In connection with the sale to Holland Hospital, $200,000 (the cost of the maintenance plan) will be recognized over the two years, $100,000 in 2010, $100,000 in 2011. There may be an character where the maintenance plan will arise shun revenue.If such case arises, guidance is provided by ASC 605-50-45-6. Negative revenue may arise from the application of the guidance in this Subtopic to cash consideration given by a vendor to a customer or from transactions or changes in estimates that are requi red to be characterized as a reduction of revenue by other Subtopics in the Codification. The Examples in segment 605-50-55 discuss some of those Subtopics and underlying circumstances that could result in negative revenue. This Subtopic addresses whether the negative revenue amount should be recharacterized as an expense in the vendors income statement. If this scenario occurs, 605-50-55 (too many Subtopics to list all here) will provide the guidance necessary to proceed.Alternative ApproachIf Eye Vision, which has been in concern for over twenty years, has recognized its revenue from maintenance plans in a expressive style other than the straight-line method, they could qualify under the portion of ASC 605-20-25-3 that states, circumstances in which sufficient historical evidence indicates that the costs of performing services under the contract are incurred on other than a straight-line basis. In those circumstances, revenue shall be recognized over the contract period in pro portion to the costs expected to be incurred in performing services under the contract. and continue doing so.Also, regarding endorsement Staff Accounting Bulletin (SAB) outcome 13 605-10-s99-1, there are examples given that could support the recognition of revenue for the maintenance plan as services are rendered. Supply or service transactions may involve the charge of a nonrefundable initial fee with subsequent monthly payments for future products or services. The initial fees may, in substance, be wholly or partially an advance payment for future products or services. Therefore, the up-front fee and the continuing performance obligation related to the services to be provided or products to be delivered are assessed as an integrated package.In such circumstances, the staff believes that up-front fees, even if nonrefundable, are earned as the products and/or services are delivered and/or performed over the term of the arrangement or the expected period of performance and genera lly should be deferred and recognized systematically over the periods that the fees are earned. (A systematic method would be on a straight-line basis, unless evidence suggests that revenue is earned or obligations are fulfilled in a different pattern, in which case that pattern should be followed.) Since Eye Vision will offer, on a when-and-if functional basis, new treatment applications for the Clear View Laser, the pattern could be deemed when available (or when delivered).