Milestone payments and variable consideration

Milestones are variable consideration under ASC 606. They are included in the transaction price only to the extent it is probable that a significant reversal will not occur. Milestones that depend on events outside the company's control, such as regulatory approvals and clinical outcomes, are constrained until the event happens. Milestones within the company's control, such as delivering a data package, may be included earlier.

When a constrained milestone is achieved, the revenue it generates is allocated to the performance obligations in the contract. If the license was already transferred, the milestone is recognized immediately. If it relates to services still being performed, part of it is recognized as a cumulative catch-up and the rest over the remaining service period.

On the paying side, milestones paid to a licensor are usually R&D expense when incurred under ASC 730 unless the acquired asset has an alternative future use, and commercial milestones after approval are capitalized as intangibles. The same word, milestone, therefore produces very different entries depending on which side of the deal the company sits on.