ASC 808: Accounting for Collaborative Arrangements

Accounting Standards Codification (ASC) 808, Collaborative Arrangements, provides a specialized accounting framework for business agreements where companies work together on a joint operating activity. The standard guides how these entities report the financial results of their shared endeavors, particularly concerning income statement presentation and disclosures. ASC 808 is not a comprehensive rulebook for every aspect of these arrangements. Instead, it directs companies to other specific accounting literature when applicable, such as clarifying how revenue-related transactions should be evaluated under ASC 606, the standard for revenue from contracts with customers.

Identifying a Collaborative Arrangement

A business relationship qualifies as a collaborative arrangement if it is a contractual agreement where all parties are active participants and are exposed to significant risks and rewards tied to the activity’s commercial success. An active participant contributes to the direction or execution of the shared operation, which is different from a passive investment. For example, if two pharmaceutical companies agree to jointly develop and market a new drug, with both contributing scientific expertise and sharing in the research costs (the risk) and potential profits (the reward), they meet both criteria. This contrasts with a simple vendor relationship where one company hires another for a fixed fee, as the second company is not exposed to the project’s commercial risks.

These arrangements are conducted through contracts rather than a separate legal entity. When collaborators create a distinct legal entity, such as a joint venture, other accounting rules for equity method investments would apply instead of ASC 808. The evaluation of whether an arrangement meets these criteria is performed at the inception of the agreement and must be reassessed if the participants’ roles or risk exposure change significantly.

Accounting for Collaborative Arrangements

Once an arrangement is identified as a collaboration, the accounting treatment focuses on presenting the financial activities on the income statement. ASC 808 does not provide detailed rules for measurement or recognition; instead, it directs entities to first consider if other accounting standards apply to activities within the arrangement.

A primary consideration is the interaction with ASC 606, Revenue from Contracts with Customers. An entity must analyze transactions with its collaborator to determine if the collaborator is a “customer” for any distinct goods or services being provided. If a part of the arrangement represents a sale of goods or services to the collaborator, that portion must be accounted for under all the provisions of ASC 606. For example, if a biotechnology company in a collaboration performs specific research services for its partner and receives payment, it must assess if those services are a distinct deliverable. If so, the payments would be recognized as revenue, as the partner is acting as a customer for that specific transaction. This analysis requires identifying the distinct units of account within the contract, as it is possible for one part of an agreement to fall under ASC 606 while other parts do not.

For transactions with third parties, such as sales of a jointly developed product to the public, the accounting follows the principal versus agent guidance in ASC 606. The company that is deemed the “principal” in the sale—typically the one controlling the product before it is transferred to the end customer—will report the revenue on a gross basis. The other collaborator would not record revenue from that third-party sale but would record its share of the profits from the arrangement.

Payments between collaborators that are not considered revenue under ASC 606 require careful judgment. The guidance allows companies to account for these payments by analogy to other accounting literature or, if no appropriate analogy exists, by adopting a reasonable and consistently applied accounting policy. These payments might be presented as a reduction of an expense, or as an expense or other income, depending on the nature of the payment. For instance, a reimbursement from a partner for research and development costs might be recorded as a reduction of R&D expense.

Financial Statement Disclosure Requirements

ASC 808 mandates specific disclosures that explain the nature and financial effects of these partnerships. Companies must disclose the nature and purpose of their collaborative arrangements. This includes describing the joint operating activities, the products or services being developed, and the rights and obligations of each participant under the contract.

A key disclosure is the company’s accounting policy for collaborative arrangements. This involves explaining how the company accounts for transactions between itself and its collaborators, especially for activities that fall outside the scope of other specific guidance like ASC 606. The policy should detail how decisions are made regarding income statement classification for payments made to or received from partners.

Finally, entities must disclose the classification and amounts of significant financial items related to the collaboration that are recorded on the income statement. For example, a company would need to disclose the amount of revenue recognized from transactions with a collaborator, as well as any amounts presented as operating expenses or as a reduction of expenses.