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Revenue for life sciences and healthcare
Efficient recognition and measurement of revenue is essential for the well being, progress and prosperity of any company or individual engaging in business transactions. As the financial markets have become more and more globalized, the need for standardized procedures has increased. That is why the new standard guidelines have been developed with the aim of streamlining the process of keeping accurate financial records and preparing financial statements.
The Five Step Principle
The main principle of measuring and recognizing revenue and cash flows is that an entity receives and records the appropriate amount from customers as a result of the services or goods the entity provides. The following five steps can be applied in order to achieve this principle:
- Establish an agreement or contract with a customer
- Agree on the exact outcomes that are identified in the contract
- Determine the amount that will be paid by the customer
- Assign the amount to the outcomes in the contract
- Recognize the revenue when the entity achieves the outcomes
Revenue for Life Sciences
Entities in the life sciences sector may need to adjust their processes and information systems in order to effectively implement the new standard.
Due to the variable nature of contracts, life sciences entities would need to consider carefully the performance obligations and outcomes to see where they are separate or overlapping. An example of this may be where a medical device is supplied along with installation costs and a maintenance agreement, thus combining goods and services.
Another area where life sciences entities would need to apply the new standard is collaboration agreements. This is where two parties agree to work together, sharing the risks and benefits, rather than having a provider / customer relationship.
When it comes to rights of return, entities need to factor these into the price of the transaction. This entails estimating the products which are likely to be returned and allocating these as a refund liability.
With regard to reseller and distributor arrangements, life sciences entities may find that with the new standard they are able to recognize revenue more promptly than previously. This will happen if the entity is able to estimate an amount of consideration that is not constrained, meaning that no significant reversal is expected to occur, in accordance with probable U.S.GAAP or highly probable IFRS.
Licences of intellectual property (IP) pose another domain where entities need to apply the new standard appropriately. This will require determining whether contracts which include IP, such as research and development or manufacturing services, are in fact contracts or financing arrangements. Depending on whether it is a contract, a distinct licence of intellectual property will be required in the new standard.
Revenue for Healthcare
The healthcare industry is unique in that some countries have a healthcare system which is operated and funded by the government. In the USA however, healthcare is provided mainly by the private sector and the government purchases services.
This means that the U.S.GAAP has specific industry related guidelines which would not apply in every aspect to other commercial revenue transaction. These would include revenue recognition principles for hospitals and clinics, as well as health plans, health maintenance and health care services.
Third parties play a significant role in the healthcare industry in the sense that health insurance companies or government programs provide funding for health services at rates that may be lower than the regular rates of the entities.