Columbia on-Line Networks

Should the Company recognize any revenue during the evaluation phase of the contract? For Columbia On-Line Networks (the Company), the answer is no. If CheapTalk decides not to execute the option phase within 90 days, the contract would be considered terminated and Columbia would then recognize the $200,000 consideration as revenue. If CheapTalk decides to invest further in The Technology and execute the option phase, Columbia similarly would not recognize any revenue during the evaluation phase. Upon executing the option phase, Columbia On-Line Networks would recognize revenue in the evaluation phase only if the deliverable to the customer is separable. In their case, the evaluation phase cannot be separated from the option phase due to failing the requirements for multiple-element arrangements described in FASB Accounting Standard 605-25-25-5. In order to be separated, the delivered item must fulfill two criteria. The first criteria is: “The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis.” This situation does not meet the criteria described above because CheapTalk is only receiving professional services during the evaluation phase. They could not turn around and sell the services given by Columbia for value. The second criteria is: “If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in control of the vendor.” The memo from Columbia's Controller indicates that CheapTalk does not have a general right of return. In the Evaluation Phase section, the Controller mentions if CheapTalk

“elects not to execute the option phase within 90 days, the Company is entitled to keep the full amount of this consideration.” CheapTalk cannot get their initial...