Eye Vision Case 10-11 Essay

eye resource Inc, a long- concentrateing medical exam device manu incidenturer, has signed a accept to sell Holland hospital the displace intellection optical maser and a ii-year one and only(a) by one priced victuals jut for $1 million and $0.2 million respectively. On a when-and-if available bais, Eye Vision Inc. leave behind provide packet program program updats that is embedded with the laser to maintainance purchasor. The softwargon has neer been sold without Laser for its functional necessity. In this memo, as explained below, we in vergeit that 1. Eye Visions puzzleing with Holland Hospital is not in spite of appearance the area of ASC 985-605, Software tax Recognition. 2. The deliverables in this order are the lick View Laser, embedded software, and care protrude, respectively. 3. The illumine View Laser unitedly with embedded software and upkeep fancy will be accounted for as signalize units of ex ruleation, respectively. 4. The laser w ith the embedded software will be accepted immediately.The maintenance plan will be recognized on a straight- task radix over the length of the sign on. 1. Is Eye Visions arrangement with Holland Hospital within the scope of ASC 985-605, Software Revenue Recognition? The symmetry between Eye Vision and Holland Hospital is not within the scope of ASC 985-605, Software Revenue Recognition. gibe to ASC 985-605-15-4(e), subtopic ASC 985-605 does not apply to transactions and activities for software components of clear convergences that are sold, licensed, or leased with actual harvest-homes when the software components and nonsoftware components of the discernible intersection point function unitedly to deliver the tactile products essential functionality. In the situation of the agreement, the clear view laser represents the tangible component, while the software component comes embedded internally within the laser.The teddy states, that the laser has never been sold with out the software because the software is essential to its functionality in performing medical procedures. We would like to consider both the Clear View Laser along with the embedded software as one tangible product. Further, ASC 985-605-15-4(f) goes on to state any 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 buyd, would be defined as an undelivered element that relates to the software that is essential to the tangible products function. because, we cerebrate that ASC 985-605 is not with in the scope of the arrangement and ASC 605-25, Revenue Recognition Multiple-Element Arrangements should be used for proper rvenue recognition.2. What are the deliverables in this arrangement?The three deliverables in this arrangement between Eye Vision and Holland Hospital are the Clear View Laser, the embedded software and the maintenance plan. According to ASC 605-25-15-2, deliverables within contractually binding arrangements include products, function, 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 case, the Clear View Laser is the main product sold by Eye Vision and is definitely a deliverable.The software provides Clear View Laser with additional functionalities different than what the laser only if could have done. Additionally in the future after the updating performed 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 anformer(a) separate product or deliverable. As to the maintenance plan, it is sold by Eye Vision one by one as an after- change service, making it the third separate deliverable.Alternative / opponent tone-beginningOne could argue that the Clear View Laser together with the embedde d software is one deliverable. Both of the laser and the software lotnot digest on their own as a separate deliverable. The ideas hold watering this rivalry are as follow 1. The Clear View Laser has never been sold without the embedded software. 2. Without each other, either the Clear View Laser or the embedded software provides no determine to their nodes. Although this alternative position sounds reasonable, we uphold our conclusion above because in this arrangement the laser and the software are equally important in terms of functionality. We should consider them two separate products, even though they have never been sold separately and provide no value to customers independently. 3. On the basis of the responses to Question 1 and 2, what are the units of accounting in this arrangement? The two units of accounting enumerateed chthonian the agreement between Eye Vision and Holland Hospital are the Clear View Laser and the maintenance plan. According to ASC 605-25-25-5, I n an arrangement with threefold deliverables, the delivered gunpoint or spots shall be considered a separate unit of accounting if both of the following criteria are met.The first standard infra ASC 605-25-25-5 states, The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any 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 resolution the sale is isolated, the software and laser have no independent value to the consumer considering the safety reasons of the medical devices. The standalone trascation of these two parts are infrequent, at that placefore 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. all past or new owner of the laser can select to purchase 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 own unit. The back up criterion states, If the arrangement includes a general right of return sexual relation to the delivered item, delivery or performance of the undelivered item or items is considered probable and intimately in the control of the vendor. The agreement states that there is no general rights of return. Therefore this is not applicable. Each unit of accounting must be evaluated then for the proper tax income recognition technique.Alternative / Opposing ApproachIt can be argued that when the Clear View Laser with the embedded software and maintenance plan are purchased together, they can all be accounted for as one unit. This is based off 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 guidance in this Subtopic, separate contracts with the same entity or related parties that are entered into at or snug the same time are presumed to have been negotiated as a software program and shall, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting.That presumption may be overcome if there is sufficient evidence 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 consideration collectable to the fact that previous owners of the Clear View Laser can purchase the maintenance plan at any given 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 tax recognition accounting literature that would be applied to each unit of accounting set 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 realizable and bring in when all of the following criteria are met1. Persuasive evidence of an arrangement exists 2. livery has occurred or services have been rendered 3. The sellers price to the buyer is fixed or determinable 4. Collectibility is reasonably assuredIn company with the sale to Holland Hospital, $1 million (the cost of the laser with embedded software) will be recognized immediately as all four criterion have been satified. As for the second unit of accounting, we 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 liability to the buyer to perform services throughout the period of the contract and, therefore, revenue shall be recognized in income over the period 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 bar in those great deal in which sufficient historical evidence indicates that the be 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 symmetricalness to the be expected to be incurred in performing 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 cost s expected to be incurred in performing services during the two-year contract. The audit team 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 instance where the maintenance plan will produce negative 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 undeniable to be characterized as a reduction of revenue by other Subtopics in the Codification. The Examples in Section 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 recharacterize d 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 business for over twenty years, has recognized its revenue from maintenance plans in a way 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 proportion to the costs expected to be incurred in performing services under the contract. and continue doing so.Also, regarding SEC Staff history Bulletin (SAB) Topic 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 fringe of a nonrefundable initial fee with subsequent periodic payments for future products or services. The initial fees may, in substance, be wholly or partly an be on 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 realise as the products and/or services are delivered and/or performed over the term of the arrangement or the expected period of performance and generally 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 whe n-and-if available basis, new treatment applications for the Clear View Laser, the pattern could be deemed when available (or when delivered).