Covid-19 Vaccine Makers to Face Challenges When Recognizing Revenue

Uncertainty around rules could complicate how companies account for vaccine sales that may come through large and complex government contracts

A laboratory technician watched vials during filling and packaging tests for a Covid-19 vaccine candidate at a Catalent facility in Anagni, Italy, last month.

Drugmakers developing Covid-19 vaccines can add one more challenge to their list: how to account for the sales.

The companies will face challenges recognizing revenue due to a lack of specific guidance from U.S. regulators and standard-setters on Covid-19 vaccines and the sheer scale of the production effort.

Vaccine manufacturers, among them Moderna Inc., Johnson & JohnsonPfizer Inc., Merck & Co., and AstraZeneca PLC, not only could have trouble determining when to book this revenue, but how much to book also could be in question, accounting experts say. Stockpiling, complex federal contracts and uncertainty around future demand for the vaccine add to the accounting complication.

About 170 different Covid-19 vaccines are being developed world-wide, according to the World Health Organization. In the U.S., several companies working on vaccines are in the middle of late-stage trials, though Johnson & Johnson and AstraZeneca have paused trials due to potential safety issues. Some drugmakers have said their vaccines could be greenlighted for use as soon as this year, while others plan for next year.

Estimates for production capacity vary among companies. AstraZeneca, for example, wants to provide two billion doses globally, significantly more than what the company has produced for other vaccines. It said one billion Covid-19 vaccines could be ready later this year.

U.S. regulators in recent years have provided general guidance on accounting for revenue from vaccines, but none specific to the Covid-19 immunization.

There are different rules for recognizing revenue from vaccines. For those that go into the U.S. government’s Strategic National Stockpile, special guidance from the Securities and Exchange Commission applies. All other vaccines sold in the U.S. are covered by the Financial Accounting Standards Board’s revenue recognition rules.

The SEC last released guidance on accounting for vaccines going into national stockpiles in 2017. It said manufacturers should recognize revenue when dosages are received by the U.S. government, meaning they don’t have to wait for the vaccines to be taken out of the stockpiles and used.

The U.S. stockpiles vaccines for childhood diseases and influenza as well as bioterror countermeasures. The SEC declined to comment on whether Covid-19 vaccines would qualify for the same accounting treatment.

There are no plans to store any potential Covid-19 vaccines in the Strategic National Stockpile, according to a spokeswoman for the U.S. Department of Health and Human Services. Various companies have agreed to supply at least 100 million doses of Covid-19 vaccines to the U.S. government.

HHS, in partnership with the Department of Defense, has put agreements in place for manufacturing of vaccine doses as part of development for six vaccines, an HHS spokeswoman said. Those doses, which are being manufactured with federal funding, won’t be stockpiled and the companies will distribute them to locations designated by the federal government, the spokeswoman said.

The SEC in March sought to ease audit requirements for certain vaccine makers, including those making the Covid-19 vaccine. It ruled that small public companies no longer need to have an auditor examine their accounting systems and safeguards known as internal controls. That should allow vaccine makers to devote more resources to research and development, Hester Peirce, an SEC commissioner, said at the time.

For immunizations that don’t fall under the SEC’s stockpiling guidance, companies have to wait to book revenue until control of the product is transferred, a technical term that means the customer is in charge of its use and can reap all available benefits from it, said Shripad Joshi, an accounting specialist at S&P Global Ratings, a ratings company.

For example, companies can’t recognize revenue from a foreign government until the government has passed the vaccines on to doctors or hospitals for use. If that revenue is deferred to later, potentially next year, there will be a mismatch between costs and revenue, Mr. Joshi said. “It’s all very unclear right now, with so many vaccine manufacturers and the timing to market,” he said.

Revenue from one contract can be booked in various amounts over multiple accounting periods, which needs to be done carefully. If a company recognizes revenue outside of the correct accounting period, it could force a company to restate its earnings.

The uncertainty about vaccines in development and the size of contracts, with some potentially covering billions of doses, make the risk of deviation from sales estimates especially high. This likely will cause complications in recognizing revenue, said Tom Selling, a retired accounting professor at Southern Methodist University.

Deciding how much revenue to book for vaccine supplies in a particular period can be a tricky judgment call, accountants say.

Some drugmakers, such as Moderna and AstraZeneca, have begun alerting investors and analysts about the accounting challenges surrounding the vaccine. “There is heightened interest in several areas of accounting that will increasingly impact our reported results as we move forward,” David Meline, Moderna’s chief financial officer, said on an Aug. 5 earnings call. The company declined to comment further.

AstraZeneca said its accounting would vary from deal to deal, depending on when it receives invoices and reimbursement from expenses. The Cambridge, U.K.-based company has agreed to produce vaccines for several customers, including the U.S. and China. “We’ll have different types of accounting for some of those deals,” Chief Executive Pascal Soriot said on a July 30 earnings call. AstraZeneca, among others, has vowed not to earn a profit from making the vaccine.

FASB hasn’t yet received any questions or concerns related to accounting for vaccines, a spokeswoman said. The standard-setter hasn’t issued guidance on revenue from Covid-19 vaccines.

Regulators or investors could challenge companies’ estimates, Mr. Johanns said. “If I was a pharma CFO, it would scare me, because I know I’m not going to be exactly right and I’m going to have to adjust the numbers later on,” Mr. Johanns said.

 

WSJ

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