1. Is the Power Starterpack a multiple-element arrangement?

According to ASC 605-25-05-1, a multiple-element arrangement is one in which a company "will perform multiple revenue-generating activities." In such an arrangement, a company provides multiple products or services, usually under a single contract. Often, a company will "transfer [those] deliverables to the customer and performance may occur at different times or over different periods of time" (ASC 605-25-05-2). Given these complexities, special accounting rules exist that allow a company to account for each element in a multiple-element arrangement separately, rather than as a combined unit.

The Power Starterpack contains two deliverables, each representing a distinct product or service. The activation card enables customers to access the network and add new functionalities to their phones, while the prepaid voucher provides future airtime minutes. In addition, the client delivers the access and additional phone functionalities first, followed by the phone service, which is provided over the plan period. Therefore, the Power Starterpack has the characteristics of a multiple-element arrangement.

2. Are the activation card and the prepaid voucher separate units of accounting?

If the client's multiple-element arrangement satisfies the following two criteria prescribed by ASC 605-25-25-5, it can account for the activation card and the prepaid voucher as separate units of accounting:
The deliverables must have standalone value to customers. If a company sells the deliverables separately, they have standalone value.
If the contract contains general rights of return, performance must be "considered probable and substantially in the control of the vendor" (ASC 605-25-25-5).
Customers can purchase the activation card separately from both the client and other independent phone retailers. The client also sells the prepaid voucher separately, so the deliverables satisfy the first condition. In addition, no general rights of return exist under the phone plan, so the second criterion does not apply.

3. How should the client allocate the arrangement consideration between the activation card and the prepaid voucher?

According to ASC 605-25-30-2, if the deliverables in a multiple-element arrangement are separate units of accounting, the arrangement consideration "[should] be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price." A deliverable may have several selling prices, depending on the nature of the transaction and the parties involved. Whenever possible, a company should use "vendor-specific objective evidence of selling price" for each deliverable (ASC 605-25-30-2). This, as indicated by ASC 605-25-30-6A, is the price a vendor charges for the deliverable when sold separately.

Since the client sells both the activation card and the prepaid voucher on a standalone basis, it should use the price it charges for each item separately to calculate relative selling price. The following table shows how the client would allocate the arrangement consideration, assuming the standalone price of the activation card is $170 and the standalone price of the voucher is $50:

Relative Selling Price Example Price of activation card when sold separately $170
Price of prepaid voucher when sold separately $50
Total consideration when sold separately $220
Total consideration for Power Starterpack $200
Revenue allocable to activation card $154.551
Revenue allocable to prepaid voucher $45.452
1($170/$220) x $200

2($50/$220) x $200

The example above assumes that no portion of the total consideration for the Power Starterpack is contingent upon the client's future provision of phone service. ASC 605-25-30-5, however, limits the amount of revenue allocable to a deliverable to the amount not contingent upon future performance. Returning to the example above, the $50 prepaid voucher represents unearned revenue, which the client will recognize if, and when, it provides phone service in the future. By not adjusting the amount allocable to the prepaid voucher from $45.45 to $50, the client may be able to recognize $4.55 ($50-$45.45) of revenue before it is earned, provided the timing of revenue recognition for the activation card is earlier than that of the voucher. Accordingly, the maximum amount of revenue the client can allocate to the activation card is $150, which is the amount not contingent upon the client's future provision of phone service.

4. When should the client recognize revenue related to the activation card and the prepaid voucher?

After allocating the arrangement consideration, the client should apply the appropriate revenue recognition rules to the activation card and the prepaid voucher separately, in accordance with ASC 605-25-25-2. As a general rule, a company should recognize revenue when it is realized or realizable and earned (ASC 605-10-25-1). A company realizes revenue when products or services are sold for cash or claims to cash. A company earns revenue when it "has substantially accomplished what it must do to be entitled to the benefits represented by the revenues" (ASC 605-10-25-1).

The client has two options for recognizing revenue related to the activation card: deferral or recognition at the time of sale. ASC 605-10-S99-1 codifies Staff Accounting Bulletin (SAB) Topic 13, which provides the SEC's guidance regarding revenue recognition for nonrefundable fees. Under this guidance, unless a fee is "in exchange for products delivered or services performed that represent the culmination of a separate earnings process," a company should defer the recognition of revenue. SAB Topic 13 further provides that an activity completed in exchange for a fee is not a separate earnings event if "the customer would ascribe a significantly lower, and perhaps no, value to elements associated with the up-front fee in the absence of the [company's] performance of other contract elements" (ASC 605-10-S99-1). The client's customers need an activation card to access the network and obtain additional phone functionalities. Without the client's provision of airtime, however, customers would be unable to make phone calls or use the phone features. This view supports the position that the activation card has no value or utility in the absence of the client's provision of phone service, making the deferral of revenue recognition appropriate.

As mentioned previously, however, customers have purchased the activation card separately in the past. Often, customers purchase activation cards to equip their phones with new functionalities. These functionalities (Bluetooth®, international calling, and additional storage) provide value, which is why customers are willing to purchase the activation cards on a standalone basis. This implies that the delivery of the activation card is a separate earnings event. In addition, the functionalities seem more like phone features than ongoing services the client would need to provide over the plan period. Following activation, customers can access these functionalities without the continued involvement of the client, so the activation card has the characteristics of a product. Therefore, the recognition of revenue at the time of sale is more appropriate than revenue deferral, as the client will earn the revenue when it delivers the activation card to a customer.

In contrast, the client will earn the revenue associated with the prepaid voucher as it provides phone service. It has an obligation to deliver phone service until customers use up their minutes, or their contracts expire through the passage of time (360 days) or inactivity (seven months). Accordingly, the client should defer the recognition of revenue from the prepaid voucher until customers use the minutes. This method of revenue recognition is consistent with the matching principle, as it will allow the client to match revenues from the prepaid voucher with expenses incurred in providing phone service. If customers have unused minutes when their prepaid vouchers expire or become inactive, the client should immediately recognize any revenue associated with the unused minutes.