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SEC Changes Accounting Guidance to Spur Participation in Federal Stockpiling Programs

By Michael Mair, December 16, 2005

On December 9, the U.S. Securities and Exchange Commission (SEC) published guidance regarding the "accounting for sales of vaccines and bioterror countermeasures to the Federal government for placement into stockpiles related to the Vaccines for Children Program [VCP] or the Strategic National Stockpile [SNS]."[1] The SEC issued the new guidance to avoid any "unintended consequences of accounting requirements that could impair the nation's ability to create and maintain sufficient supplies of various vaccines and bioterror countermeasures."[1] At issue is SEC accounting guidance for when manufactures can recognize revenue in financial statements from "bill and hold" sales for countermeasures for stockpiles related to the VCP and SNS. Bill and hold sales are sales where a customer purchases a good but the seller maintains physical possession of the good until the customer requests shipment.[2] There is concern that prior SEC accounting guidance has created the potential for revenue recognition to be delayed until after the countermeasure is "placed in the stockpile"[1] and that this could prevent some manufacturers from participating in the VCP and SNS programs.

The SEC has set forth seven criteria which have to be met in order to recognize revenue from bill and hold sales:

"The risks of ownership must have passed to the buyer;
The customer must have made a fixed commitment to purchase the goods, preferably in written documentation;
The buyer, not the seller, must request that the transaction be on a bill and hold basis. The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis;
There must be a fixed schedule for delivery of the goods. The date for delivery must be reasonable and must be consistent with the buyer's business purpose (e.g., storage periods are customary in the industry);
The seller must not have retained any specific performance obligations such that the earning process is not complete
The ordered goods must have been segregated from the seller's inventory and not be subject to being used to fill other orders; and
The equipment [product] must be complete and ready for shipment."[3]

The new guidance states that "transfers of vaccines to government stockpiles sometimes do not satisfy"[1] requirements 4 and 6.

Under the new guidance, the SEC "will not object if vaccine manufacturers recognize revenue from the sale of enumerated vaccines related to Federal governmental stockpile programs if the arrangements meet the applicable revenue recognition criteria specified under generally accepted accounting principles and [SEC] rules and regulations, other than for the requirements associated with product delivery [#4] and inventory segregation [#6] noted above, so long as disclosures are provided that allow for a clear understanding by investors of the subject transactions, the related accounting, and the effect of this alternative accounting method in the financial statements."[1]

The new guidelines apply specifically to "enumerated vaccines," defined as childhood disease vaccines, influenza vaccines, and other vaccines and countermeasures "sold to the Federal government for purposes of placing the vaccines into a Federal governmental vaccine stockpile."

References

Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement Into the Pediatric Vaccine Stockpile or the Strategic National Stockpile; Final Rule. U.S. Securities and Exchange Commission. December 9, 2005. Available at: http://frwebgate2.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=716559347311+0+0+0&WAISaction=retrieve. Accessed December 16, 2005.
Hurtt DN, Kreuze JG, Langsam SA. Auditing to Combat Recognition Fraud. The Journal of Corporate Accounting & Finance. May/June 2000 2000;11(4):51-59.
SEC Staff Accounting Bulletin: No. 101 - Revenue Recognition in Financial Statements. U.S. Securities and Exchange Commission. December 3, 1999. Available at: http://www.sec.gov/interps/account/sab101.htm. Accessed December 16, 2005.