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Health tech accounting
A health tech industry accounting guide
Companies in the health tech, or the converging technology and health care/life sciences industries, may face unique accounting challenges—particularly in the areas of capitalized software and revenue recognition. Read on for a preview of “Health tech investment trends: How are investors positioning for the future of health?” and insights identifying and addressing complex technical accounting issues for health tech companies.
Many key accounting and financial reporting considerations stemming from the COVID-19 pandemic are related to topics addressed in this guide. But we also encourage you to review Deloitte’s Financial Reporting Alert, which discusses considerations associated with COVID-19 that are broadly applicable as well as those specific to health tech and life sciences.
The emerging health tech marketplace
It can be difficult to identify a health tech company. These companies typically employ a go-to-market strategy associated with a unique intellectual property (IP) or software-as-a-service (SaaS) solution focusing on the life sciences or health care marketplace.
But much like their counterparts in other industries, health tech companies are shaking up long-standing business models and methods of health care, as well as sources of, and ways of accessing, information.
Through their focus on consumer health information, clinical decision support, fitness and wellness, disease monitoring and diagnostics, drug discovery and bioinformatics software, health care administration software, and medical imaging software, these companies are filling the “white space” that traditional technology and health care accounting companies haven’t previously addressed.
A key characteristic of a health tech company is the disruption that it provides to a specific part of the life sciences or health care market. The disruption these health tech companies are causing is seen daily on the national stage and is rampant throughout these different markets. As a result of this disruption, life sciences and health care companies are realizing the importance of using data to advance technology that specifically applies to life sciences and health care.
The future of health care will affect incumbent stakeholders, new entrants, employers, and consumers. Many incumbents are understandably hesitant to drive change in a marketplace that they currently dominate. Given their strong foothold in the existing ecosystem, as well as their ability to navigate the regulatory environment, these organizations may be well-positioned to lead from the front if they can utilize proprietary technology.
Health tech companies often rely on the development of proprietary software to serve their customers and clients. In determining which authoritative guidance to apply to the capitalization of software, a company should consider how it plans to offer its software solutions to its customers.
ASC 985-20 is the authoritative guidance on software solutions that are often referred to as “external-use software.” This guidance indicates that in assessing how to account for these software development costs, an entity should determine whether there is a substantive plan to market the software externally or whether one will be created during the software’s development period.
ASC 350-40 is the authoritative guidance on internal-use software solutions. This guidance, which applies to software developed or obtained for internal use, including in providing a service (such as “software-as-a-service”), requires that any plan to market internal-use software be substantive before the entity looks to ASC 985-20 to determine the accounting for the software project.
Revenue recognition for health tech companies
The variety of solutions offered by health tech companies is staggering, and many health tech companies provide their products or services by using two primary service offerings:
- SaaS — In this arrangement, which is typically referred to as a cloud computing arrangement, the customer does not take ownership of the product, and the SaaS solution is considered a service provided by the company.
- On-premises perpetual or subscription licenses — The software sold by the health tech company to its end customer at a point in time; this software is commonly sold along with postcontract customer support (PCS) services or other products and services, such as professional services, other SaaS, or hardware.
Accounting for revenue recognition that applies to common arrangements in the health tech industry can be challenging. See the full guide for more information on revenue recognition models applicable to the health tech accounting industry.
Read now for insights:
Insights from funding data and investment expert interviews reveal that health care innovators have begun to fill the gap between current and future needs. It's time for health care incumbents to strategize accordingly.