Summary: These slides were presented at our EY Thought Center webcast on 15 June 2015 and explore how the revenue recognition standard will affect pharma, biotech and medtech companies. They look at practical application issues specific for life sciences companies and the implementation challenges, such as project set up, contract selection and use of tools. The webcast was hosted by Scott Bruns, EY Global Life Sciences Assurance Leader and included Tim Gordon, EY Global Life Sciences Financial Accounting Advisory Services Leader, Frederik Schmachtenberg, EY Global Life Sciences Assurance Resident and special guest, Derek Kosti, Senior Director of Finance and Worldwide Controller at Pfizer Inc. To hear a replay of the one hour webcast, copy this url into your browser: www.ey.com/GL/en/Issues/webcast_2015-06-18-1600_revenue-recognition-standard-for-life-sciences.

1. The new revenue
recognition standard
for life sciences
companies
Hosted by EY Global Life Sciences
15 June 2015

2. Page 2
Scott Bruns
Ernst & Young LLP
Partner, Global Life Sciences
Assurance Leader
Today’s moderator
The new revenue recognition standard for life sciences companies

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Today’s presenters
Derek Kosti
International Controller
for Pfizer’s Worldwide
Biopharmaceuticals
Business
Tim Gordon
EY Global Life Sciences
Financial Accounting
Advisory Services Leader
Frederik
Schmachtenberg
EY Global Life Sciences
Assurance Resident
The information contained herein is a summary in nature. Viewers should consult their own professional
advisors to address their individual circumstances and concerns.
The new revenue recognition standard for life sciences companies

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Agenda
► The 5-step model
► Applying the 5-step model: life sciences industry-
specific examples
► Implementation considerations
The new revenue recognition standard for life sciences companies

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► Core principle: recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange
for those goods or services
Applying the new standard: the 5-step model
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) each performance obligation is satisfied
The new revenue recognition standard for life sciences companies

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Agenda
► The 5-step model
► Applying the 5-step model: life sciences industry-
specific examples
► Implementation considerations
The new revenue recognition standard for life sciences companies

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Example 1:
► Biotech out-licenses the rights to an investigational compound in
phase II and will perform R&D services to Pharma
► Biotech receives an upfront nonrefundable payment of $50 million,
and R&D services are billed at an agreed upon FTE rate
► Assume for this example, that the license and the R&D services are
capable of being distinct (e.g., the R&D services provided by Biotech
are not considered complex and could be performed by others in
the market)
► Question: Are the license and the R&D services distinct in the context
of the contract (i.e., separate performance obligations)?
Distinct within the context of a contract
(Part of Step 2: identify performance obligations)
The new revenue recognition standard for life sciences companies

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Distinct within the context of a contract
(Part of Step 2: identify performance obligations)
Distinct within the context of a contract
Both Boards
Clarify when a promised good or service is “separately identifiable” from other
promises in a contract (i.e., distinct within the context of the contract)
FASB
(May 2015
Exposure Draft)
Three-part change:
1. Refine the principle for determining distinct within the context of the contract
(i.e., whether the multiple promised goods or services work together to
deliver a combined output)
2. Align this principle with the standard’s three indicators for determining when
a good or service is not separately identifiable: (1) the entity is using the
goods or services as inputs to produce or deliver the combined output or
outputs specified by the customer; (2) one or more of the goods or services
significantly modifies or customizes one of the other goods or services; (3)
goods or services are highly interdependent or highly interrelated
3. Add examples
IASB
(tentative decisions)
Add examples
The new revenue recognition standard for life sciences companies

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Example 2:
► Pharma sells a product to a public hospital in a country that is in
financial difficulties in connection with the sovereign debt crisis
► Pharma has a history of delays in receipt of payment for sales due to
poor economic conditions
► On average, Pharma has days sales outstanding of 500 days and
typically receives $0.70 per dollar of the initial sales price
► Further assume that Pharma deems collection probable for $0.70 per
dollar of the initial sales price and the other criteria in Step 1 (as part
of assessing the attributes of a contract) have been met
► Question: What should be considered when evaluating whether
revenue would be recognized under:
(1) Current US GAAP and IFRS?
(2) ASC 606/IFRS 15?
Variable consideration – price concessions
(Part of Step 3: determine the transaction price)
The new revenue recognition standard for life sciences companies

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Example 2 (continued):
Variable consideration – price concessions
(Part of Step 3: determine the transaction price)
Current US GAAP and IFRS ASC 606/IFRS 15
• Pharma would need to determine
whether collectibility is reasonably
assured (US GAAP)/if it is probable that
the economic benefits will flow to the
entity (IFRS)
• If those criteria are not met, Pharma
would need to defer revenue recognition
until payments from the customer are
received, assuming the other basic
revenue recognition criteria have
been met
• If Pharma is aware of potential
collectibility issues at the onset of the
contract, but is still willing to enter into
the contract, the arrangement may
include implied price concessions.
Under the new standard implied price
concessions are considered variable
consideration and should be reflected in
the estimated transaction price.
• Once determined, the transaction price
is allocated to the performance
obligations and recognized as revenue
as control of the product transfers to
the customer
The new revenue recognition standard for life sciences companies

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Example 3:
► Biotech out-licenses the rights to an investigational compound in
phase II and will perform R&D services for Pharma
► Biotech receives an upfront nonrefundable payment of $50 million,
and R&D services are billed at an agreed upon FTE rate
► Assume for this example that the license and R&D services
are distinct
► Question: How should the amount of the transaction price allocated to
the license be recognized?
Nature of promise in granting a license of Intellectual
Property (IP) (Part of Step 5: recognize revenue)
The new revenue recognition standard for life sciences companies

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Nature of promise in granting a license of IP
(Part of Step 5: recognize revenue)
* Unless the functionality of the IP is expected to substantively change as a result of activities performed by the entity that
do not transfer a good or service and the customer is contractually or practically required to use the updated IP
The nature of an entity’s promise in granting a license of IP
Both Boards
(May 2015
FASB ED; IASB
tentative decisions)
• Activities performed by the licensor that affect the “utility” of the IP 
revenue recognized over time
• Utility = the IP’s ability to provide benefit or value
• If IP has significant standalone functionality, licensor’s activities will not
significantly affect a substantial portion of the utility of the IP  revenue
recognized at a point in time
FASB
(May 2015 ED)
IP will be classified into one of two categories:
• Functional (revenue recognition at a point in time*): IP would have
standalone functionality (e.g., drug formulas, biological compounds)
• Symbolic (revenue recognition over time): IP would not have standalone
functionality (e.g., brands, trade names, logos)
IASB
(tentative decisions)
• Only minor wording changes to expand on the principles in the new
standard
• Will not include a requirement to classify licenses of IP as either functional
or symbolic
The Boards agreed that both of their approaches generally would result in consistent answers.
The new revenue recognition standard for life sciences companies

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Example 4:
► Biotech out-licenses the rights to an investigational compound in
phase II and will perform R&D services for Pharma
► Biotech receives an upfront nonrefundable payment of $50 million,
and a quarterly payment for R&D services that are billed at an “at
market” FTE rate. Biotech is eligible to receive a 5% royalty on all
sales of a commercialized product.
► Assume for this example, that the license and R&D services are
distinct and that the stand-alone selling price of the license is the
$50 million upfront payment plus the 5% royalty rate
► Question:
► When should the 5% royalties revenue be recognized?
Sales- and usage-based royalties exception
(Part of Step 5: recognize revenue)
The new revenue recognition standard for life sciences companies

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Sales- and usage-based royalties / other license issues
(Part of Step 5: recognize revenue)
Sales- and usage-based royalties
Both Boards
(May 2015 FASB
ED; IASB tentative
decisions)
• The sales-based royalty exception would be applied to the overall royalty
stream when the predominant item to which the royalty relates is the license
of IP
• A sales-based royalty would not be partially in the scope of the sales-based
royalty constraint guidance and partially in the scope of the general variable
consideration constraint guidance
Other license issues
FASB
(May 2015 ED)
• An entity would need to consider the licenses guidance when determining
the pattern of revenue recognition for a combined performance obligation
that includes a license
• Restrictions of time, geographical region or use do not define whether a
performance obligation is satisfied at a point in time or over time or affect
how many goods or services are promised in the contract
IASB (tentative
decisions)
• No changes
• Existing guidance is sufficient
The new revenue recognition standard for life sciences companies

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Agenda
► The 5-step model
► Applying the 5-step model: life sciences industry-
specific examples
► Implementation considerations
The new revenue recognition standard for life sciences companies

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‘We don’t think there
will be significant
changes so why
should we do
anything?’
► Detail
► Documentation
► Disclosure
Impact and challenges of the new standard
The new revenue recognition standard for life sciences companies

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Customers
Impact and challenges of the new standard
Patient
Physician
Hospital
GPO
Pharmacists
Wholesalers
Specialty
distributors
Supermarkets
Government
agency
Competitors
Contract type/terms
Licenses
Direct to consumer
Return rights
Variable consideration
Rebates
Outcome based
Cost sharing
Milestones
CRO agreements
GeographyProducts
Products
Portfolio of
products
The new revenue recognition standard for life sciences companies

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Performing a diagnostic will enable
you to:
► Identify relevant revenue streams and
“unique” contracts
► Understand high-level financial and
existing in-progress project effects
► Decide on a transition method
► Prepare a detailed planning budget to
understand the level of resources
required
► Navigate stakeholder questions
regarding changes and effects
Action planning and next steps
Why start a diagnostic now?
The new revenue recognition standard for life sciences companies

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Practical challenges and questions
How to start the
assessment process?
► Team –
internal/external,
central/decentralized,
expertise needed?
► Education sessions –
how broad?
► Use of questionnaire/
surveys – how deep?
What operational
changes are we
expecting to see?
► Changes to current
contracts?
► More people outside of
finance that need to be
technically trained?
► System changes?
Challenges during
the process?
► What market coverage
is appropriate?
► How many contracts
should be reviewed?
► How much
documentation is
enough?
► Use of tools?
The new revenue recognition standard for life sciences companies

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Action planning and next steps
Before 31 December 2015
Must:
► Read the standard
and understand the
accounting
implications
► Communicate
results internally
and with other
stakeholders
► Understand what
the industry is doing
Should:
► Appoint a project
lead and cross
functional team
► Educate the
accounting and
commercial teams
► Identify revenue
streams and survey
pilot markets
► Decide on a
preferred transition
method
► Consider the tax and
systems implications
Could:
► Identify the
financial effects
► Understand the
disclosure
requirements
► Develop a data
collection plan
► Revise accounting
and procedural
policies
The new revenue recognition standard for life sciences companies

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EY resources
► EY Revenue Recognition Readiness tool
► Recent IFRS EY publications (visit ey.com/IFRS)
► Applying IFRS: A closer look at the new revenue recognition standard (June 2014)
► Applying IFRS in Life Sciences: The new revenue recognition standard – life
sciences (November 2014)
► Applying IFRS: Joint Transition Resource Group for Revenue Recognition items of
general agreement (May 2015)
► Recent US GAAP EY publications (visit ey.com/accountinglink)
► Technical Line, A closer look at the new revenue recognition standard (June 2014)
► Technical Line, The new revenue recognition standard — life sciences (August
2014)
► Joint Transition Resource Group for Revenue Recognition items of general
agreement (April 2015)
► To the Point, FASB proposes first round of amendments to its’ new revenue
recognition standard (May 2015)
The new revenue recognition standard for life sciences companies

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Scott Bruns, Global Life Sciences Assurance Leader
scott.bruns@ey.com
+1 317 681 7229
Tim Gordon, EY Global Life Sciences FAAS Leader
tim.gordon@ey.com
+1 212 773 6938
Frederik Schmachtenberg, EY Global Life Sciences Assurance Resident
frederik.schmachtenberg@ey.com
+1 312 879 5026
EY contact information
The new revenue recognition standard for life sciences companies

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Disclaimer
► These slides are for educational purposes only and are not intended, and should not be
relied upon, as accounting advice.
► This presentation is provided solely for the purpose of enhancing knowledge on tax
matters. It does not provide tax advice to any taxpayer because it does not take into
account any specific taxpayer’s facts and circumstances.
► The views expressed by the presenters are not necessarily those of
Ernst & Young LLP.
► This presentation is © 2015 Ernst & Young LLP. All Rights Reserved.
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