ASC 606 for license and collaboration agreements

Under ASC 606 the company identifies the contract, identifies performance obligations, determines the transaction price, allocates it, and recognizes revenue as each obligation is satisfied. For a biotech the performance obligations are typically a license to intellectual property, research or development services, manufacturing supply, participation on committees, and sometimes options to license additional programs.

The first judgment is whether the license is distinct from the services. A license of functional IP that the partner can use on its own is recognized at a point in time, usually when the license transfers. A license bundled with research the partner cannot benefit from separately is recognized over the service period, often using an input method based on costs incurred. That single conclusion can move tens of millions of dollars between quarters.

The transaction price includes the upfront payment and any variable consideration that is probable of not reversing. Development and regulatory milestones are usually constrained until achieved; sales-based royalties are recognized when the sales occur under a specific exception. Options are assessed for material rights, which are separate performance obligations.