USA Recognition of payout business contract

[Louis]

Good evening all,

A company I am currently doing books for is based in the US and had a contract with a medical research institution where this medical research institution was paying a regular monthly figure into our bank account. The contract is about to be prematurely terminated and an agreed lump sum/payout figure has been agreed upon.

Based on US taxation law, once this payout figure is paid into the company's bank account, is it possible to recognise this revenue over the remaining life of the contract (if it had not been terminated) and therefore pay the tax due only on what is recorded as revenue ?

Thanks for your help.
Louis.

 

[Dave In Capital]

This would be a scenario requiring interpretive guidance on the matching principle of accounting. Generally, revenue recognition must match the recognition of expenses. This table from FASB illustrates:

FASB Matching Principle

Certain industries have certain exceptions carved out for them. Those industries include, but are not limited to:

FASB recently released an update to those exceptions with the intent of condensing them under a common umbrella. Deloitte & Touche explain:

D&T on FASB Matching Principle Update

Never the less, the fundamental purpose of the matching principle still applies as noted in that paper:

The overarching principle extends from the original intent of the matching principle:

 

[Kat Maple]

Hello

On the matching principle, the correct statement of it is not that revenue recognition must match the recognition of expenses but that expenses have to be matched with revenues as long as it is reasonable to do so.
Also, I think giving a background on the issue is somewhat helpful but it would be most helpful to Louis if a definite answer to his question ( possible to recognise this revenue over the remaining life? Yes or no?) is given.

Just food for thought

Kat

 

[Dave In Capital]

Hello

On the matching principle, the correct statement of it is not that revenue recognition must match the recognition of expenses but that expenses have to be matched with revenues as long as it is reasonable to do so.
Also, I think giving a background on the issue is somewhat helpful but it would be most helpful to Louis if a definite answer to his question ( possible to recognise this revenue over the remaining life? Yes or no?) is given.

Just food for thought

Kat

Is it possible to match revenues and expenses with recognition of either?

Financial reporting is designed to serve the priorities of the users' reasonable judgement. That is why where possible I try to provide guidance in place of finite instructions. As you stated, we could use more background. Ultimately, it is outside of our discretion and within that of his organization.

The quoted guidelines state that the revenues should be recognized as the services are performed. If no services remain to performed, and revenues were received, then the reasonable judgment of the intended users of the financial statements remains to be determined.

 

[Praz Finpoint]

If the contract is terminated prematurely and a lump-sum pay-out is made, there is no longer a contract that exist or a service that needs to be rendered to the medical research institution further. So, I don't see how you can recognize this lump sum payout as revenue over the remaining term of the contract - revenue, in the above case, is to be recognized once it is certain the contract is terminated and the medical institution has formally agreed to make the lump sum payment.