REVENUE RECOGNITION SUBTLETIES & PITFALLS FOR LIFE SCIENCES COMPANIES

JOHN PENNETT CPA, PARTNER
DIRECTOR, LIFE SCIENCES PRACTICE

By now, most life sciences company CFOs and Controllers should be fully aware of the primary revenue recognition criteria as established by the Securities Exchange Commission (SEC). And we all realize that revenue recognition continues to be a Critical Accounting Policy for all companies. In the SEC's Staff Accounting Bulletin (SAB) 101/104, the commission established the four major criteria for revenue recognition, which are: that persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed or determinable, and collectibility is reasonably assured. While everyone has adopted this guidance, there are countless other accounting pronouncements which govern the manner in which revenue should be recognized. The subtleties of revenue recognition, critical to any organization's financial reporting, are dependent upon many factors, including the industry in which the company operates. The following are highlights of revenue recognition subtleties that affect the life sciences arena and can frequently be overlooked.

Multiple Element Arrangements

In accounting, certain contracts are deemed to have multiple elements. The current accounting literature requires that such elements are separated and recognized separately based upon standard revenue recognition guidance. A common example of this type of an arrangement can be found in licensing agreements, where companies will license compounds or products, provide for clinical support agreement, and provide for a royalty stream once approved for commercialization. When all of these revenue streams are combined into one, for accounting purposes they must be separated. The difficulty results from the requirement to recognize each element at its "fair value", which may or may not be consistent with the explicit licensing terms. Further, developing documentation to support these "fair values" is often difficult given the uniqueness of each licensing agreement, although there are some industry norms which may provide guidance.

Upfront Fees

Many times in the life sciences licensing arena, organizations charge a one-time, non-refundable, up-front fees. In accordance with Staff Accounting Bulletin #101/104 by the Securities and Exchange Commission, "up-front fees, even if nonrefundable, are earned as the products and/or services are delivered and/or performed over the term of the arrangement or the expected period of performance and generally should be deferred and recognized systematically over the periods that the fees are earned." In essence, if a company charges an up-front fee, the revenue generated from this fee should be deferred and recognized over the period of the average customer life.

Other milestone fees paid to the licensee are often recognized upon successful clinical outcome, however, in certain instances, these fees (even if non-refundable) may be required to be deferred if the milestone payment is the subject of a multiple element agreement or all of the revenue recognition criteria have not been met.

Product Sales

Sales of products in the life sciences industry are often subject to deductions, which require quantification and recognition at the time of sale. It is essential that companies maintain careful records to support its assumptions and calculations of these sales deductions. The principal areas where such deductions occur include:

• Chargebacks from wholesalers
• Rebate and discount programs
• Returns

DOES IT REALLY MATTER WHO AUDITS YOUR EMPLOYEE BENEFIT PLAN?
YES, YES, YES!

DIANE M. WASSER CPA, PARTNER
DIRECTOR, PENSION SERVICES GROUP

After 20 years of being involved in employee benefit plan audits, we have heard this question many times.

Thanks to the AICPA's Employee Benefit Plan Quality Center (EBPAQC), there is a place for committed firms, like Amper, to show their commitment and get assistance with continuous improvement of employee benefit plan audits.

Diane Wasser, Partner and Partner in Charge of Amper's Pension Services Group, sits on the Executive Committee of the EBPAQC and is deeply involved and committed to educating the profession on improving audit quality and understanding the unique aspects of a Plan audit.

In order to be eligible for membership in EBPAQC, firms must:

• Designate an audit partner to have firm-wide responsibility for the quality of our ERISA employee benefit plan audit practice.


• Have all audit partners eligible for AICPA membership be members of the AICPA.


• Establish a program to ensure that all ERISA employee benefit plan audit engagement personnel possess current knowledge, appropriate to their level of involvement in the engagement, of applicable professional standards, rules and regulations for ERISA employee benefit plan audits and further comply with specific Continuing Professional Education requirements.


• Make publicly available information about our most recently accepted peer review.


• Establish written policies and procedures specific to our ERISA employee benefit plan audit practice to comply with the applicable professional standards and EBPAQC membership requirements.


• Establish annual internal inspection procedures that include a review of our ERISA employee benefit plan audit practice.


• Assure employee benefit plan audits selected as part of our peer review are reviewed by individuals employed by an EBPAQC member firm.

Over the years we have heard many excuses as to why a quality Plan audit may not be of primary concern to Plan Sponsors. Here are some of those excuses along with rebuttals.

1. Excuse:
   We (plan administrator) timely file our Form 5500 every year; our plan's auditor isn't the greatest, but they are quick, cheap and hardly ask for any supporting documentary evidence.
   Rebuttal:
   A quality audit assists a Plan Administrator in carrying out its legal responsibility to file a complete and accurate Form 5500 for each plan, each year. An incomplete, inadequate or even untimely audit report can result in penalties being assessed against the plan administrator. These could be as much as $50,000 per plan, per year.
2. Excuse:
   Our plan isn't that difficult, we don't need a firm as qualified as yours to do our Plan audit.
   Rebuttal:
   We will most likely see you in a few years when you get your letter from the Department of Labor regarding a substandard audit and we'll try to bail you out of perpetuating that $50,000 penalty year after year.
3. Excuse:
   I like the Plan auditor we have now; they only audit our one plan so we get their full attention.
   Rebuttal:
   One of the most common reasons for deficient audit reports is failure of the auditor to perform tests in areas unique to employee benefit plans, for example participant detail. Special, unique audit standards and rules apply to plan audits.
4. Excuse:
   We have over 100 eligible participants now, but probably won't in a few years so we'll wait and see if they catch us.
   Rebuttal:
   See number 1 and if you think of "tweaking" the number of participants reported on the Form 5500 read on. A $100,000 fine and/or 10-year imprisonment apply to individuals for willful violation of the reporting and disclosure requirements of ERISA ($500,000 for corporations). These can be sought in cases of false statements on ERISA documents including 5500's.

Company representatives making decisions on behalf of an employee benefit plan are fiduciaries. Fiduciaries are those who manage employee benefit plans and their assets and make decisions regarding the Plan. Being a fiduciary is a serious responsibility. They are carrying out responsibilities on behalf of the Plan, including fulfilling its annual reporting obligations under ERISA.

Amper has devoted significant resources to the employee benefit plan audit area and has devised a streamlined approach that employs Amper's Best Practices, all which provide Plan Sponsors with a quality audit necessary to fulfill their annual reporting obligations.

MARC L. SCUDILLO MS, MBA, CPA, CFP
MANAGING PARTNER
AMPER FINANCIAL SERVICES

There is an estimated 77 million baby boomers in America born between 1946 to 1964, and the first of them start to turn 60 this January. Through their sheer size, this generation has given rise to a host of industries, trends, and services that are now part of our everyday lives: rock 'n' roll, online shopping, Earth Day, sport utility vehicles, Botox, Viagra, Panera Bread & Starbucks to name a few. America is on the verge of the greatest wealth transfer in its history according to a 2004 article in the Insurance Journal called "Baby Boomer Wealth Transfer". The baby boomers primary recipients of this shifting wealth have redefined expectations around financial matters. As financial planning evolves, understanding the needs, wants and trends of the baby boomers will be paramount to successful boomer planning.

Planning Trends
Baby boomers see wealth as a means, not an end - a means of achieving what they want out of life. For these people, the typical investment strategies are hardly enough to meet their financial planning expectations. The management of their wealth should center around things such as career and business transitions, special medical needs, philanthropy, major lifestyle changes and family issues to name a few. In most planning institutions today, the wealthy are juggling an array of specialist advisors who offer incomplete solutions based on their own areas of expertise. Left to wade through the morass of independent views and often-contradictory advice, they are frustrated, overwhelmed and unsure of their decisions. Baby boomers want someone they can trust to pull together the necessary resources and expertise and offer advice based on a deep understanding of their goals, dreams, and concerns.

Retirement Plans
Research shows a great interest among baby boomers in staying productive. A recent survey by Merrill lynch found that 75% of boomers intend to keep working in retirement. Boomers expect to retire from their current jobs at the average age of 64 - then launch a new career - the "next phase" of work. Some want a new job that's more personally rewarding or a more flexible work schedule. The "retiring" entrepreneurs that have sold their businesses want to do some thing else now but are in want of a simpler, fast track version of building a business. Many of our clients are stating that if they can be productive while maintaining their other retirement nest egg, they would be fine if the new venture is a break even.

Supporting Dependents Trend
In the past year, a recent Pew Research pole found that 50% of all boomers were raising one or more young children and/or providing primary financial support to one or more adult children or elderly parent. This dynamic requires planners to not only plan on the income needs for the boomer themselves but also what the requirements are for providing income to support the parent/child they are supporting.

Housing Trends
When it comes to housing two trends are emerging. Later life could signal a return to communal living for boomers, people seek a lifestyle that's more affordable, social and supportive. On the other hand, the very affluent are not downsizing but actually, building bigger homes. Some of these homes are in prime areas such as waterfront property and ski resorts. The logic is to have a place that is desirable for all of the family to get together.

Boomers have been in an aggressive period of accumulating assets - homes, cars, boats, etc., but now they are going into a period of accumulating experiences. These experiences changed the way we get coffee, sandwiches, even some banking. Unlike their parents and grandparents, most boomers will not have the benefit of a pension check arriving each month. With the trends of Baby boomers, traditional financial planning will need to adapt and consider these common themes to service and provide the experience this generation will demand.

Amper, Politziner & Mattia’s Public Company Practice continues to grow, as more and more companies recognize the talent, service and value Amper offers to this sector. The firm is now listed as the 9th leading public company auditor in the country in the 2005 edition of “Who Audits America,” an annual ranking by Spencer Harris, Data Financial Press. This is an increase of two places over the 2004 listings.

Whether it’s issues of staffing capacity within the international accounting firms, the additional work now required under Sarbanes-Oxley, or the high levels of talent that regional firms are now attracting, firms like Amper are becoming frequent choices when it comes time to appoint auditors within the public company sector. Audit committees, boards of directors, investors and company management have all developed a level of comfort engaging accounting firms other than international and national firms.

Amper has been representing both public and private companies since 1965 and was named the fastest-growing audit practice among firms in its revenue category by Public Accounting Report. Amper is a member of the Center for Public Company Audit Firms of the American Institute of Certified Public Accountants and is registered with the Public Companies Accounting Oversight Board. The firm is a member of Baker Tilly International, a network of leading independent regional accounting firms throughout the world, allowing Amper to offer the global reach of an international firm while maintaining the personal touch of a regional firm.

53rd Edition, Spencer Harris, Data Financial Press	June 2005
Auditor Cum.Sales Clients $1x25 $26x50 $51x100 to $250 to $500 to $1Bil to $5Bil $5 Bil + 1 PWC $3,169,978 1,017 146 57 94 148 136 131 197 108 2 EY $2,567,694 1,254 218 83 112 205 154 168 218 96 3 DT $2,463,694 889 125 57 86 126 121 121 160 93 4 KPMG $1,790,337 1,013 179 87 123 162 135 102 164 61 5 BDO $55,613 302 128 55 36 44 23 5 10 1 6 GTI $48,756 358 128 56 66 60 31 10 7 0   open $9,860 142 96 8 15 10 8 4 1 0 7 McGP $6,175 96 47 22 15 8 3 0 1 0 8 CCC $5,333 86 35 20 20 9 0 2 0 0 9 Amper, Politziner & Mattia $2,931 23 13 2 2 4 0 0 2 0 10 MAC $2,581 50 16 19 8 6 1 0 0 0 11 BKD $2,544 38 16 4 10 6 2 0 0 0 12 CSDL $1,549 1 0 0 0 0 0 0 1 0 13 RAE $2,198 59 44 2 7 3 3 0 0 0 14 DIXH $1,810 21 6 6 7 0 1 1 0 0

DANIEL J. GIBSON CPA, EA
Director

The driving force behind the American Jobs Creation Act of 2004 (the Act) was the need to repeal the exclusion for extraterritorial income (ETI) that the World Trade Organization found to be an illegal export subsidy. The violations provoked the European Union to impose tariffs on U.S. companies. However, the Act goes far beyond simply repealing the ETI and ushers in a breathtakingly large variety of tax incentives and revenue offsets that apply both widely and to specialized industries and taxpayers. The centerpiece of the legislation is a new deduction for production activities conducted in the U.S.

Here are more details regarding these important provisions.

ETI Repeal

The Act repeals the ETI exclusion effective for transactions occurring after Dec. 31, 2004, except for transition relief. Under the transition rules:

1. the ETI exclusion continues to apply to transactions in the ordinary course of business that are pursuant to a binding contract that was in effect on Sept.17, 2003, and at all times thereafter; and
2. taxpayers are provided with 80% of their otherwise-applicable ETI benefits during 2005 and 60% of their otherwise-applicable ETI benefits during 2006.

New deduction for U.S. production activities

The Act replaces ETI with a new tax deduction for domestic production activities. The deduction is the lesser of (i) a percentage of the net income from those activities-3% in 2005-2006, 6% for 2007-2009, 9% after 2009; or (ii) taxable income. When fully phased in, the deduction is designed to be economically equivalent to a 3-percentage point reduction in the federal income tax rate on U.S.-based production activities. The amount of the deduction for any tax year may not exceed 50% of the employer's W-2 wages for that tax year. The deduction is available to all taxpayers with qualified production activities income and is allowable in computing alternative minimum taxable income.

The U.S. production activities deduction is allowed with respect to a taxpayer's qualified production activities income. This is defined as the amount of the taxpayer's domestic production gross receipts for the taxable year in excess of the sum of (i) cost of goods sold allocable to such receipts, (ii) other deductions, expenses, or losses directly allocable to such receipts; and (iii) a ratable portion of other deductions, expenses, and losses that are not directly allocable such receipts or another class of income.

Domestic production gross receipts are gross receipts derived from:

• Any lease, rental, license, sale, exchange, or other disposition of-
  • qualifying production property (i.e., tangible personal property, any computer software, and certain sound recordings) that was manufactured, produced, grown, or extracted in whole or in significant part by the taxpayer within the U.S.
  • any qualified film produced by the taxpayer; or
  • electricity, natural gas, and potable water produced by the taxpayer in the U.S.
• Construction performed in the U.S.
• Engineering and architectural services performed in the U.S. for construction projects in the U.S.

For pass-through entities such as S corporations, partnerships, and estates and trusts, the deduction generally is determined at the shareholder, partner, or similar level by taking into account at that level the proportional share of the qualified production activities income of the entity.