ACHN 2017 Annual Report

When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue related to upfront license payments will be recognized. Revenue will be recognized using either a proportionate performance or straight-line method. We recognize revenue using the proportionate performance method provided that we can reasonably estimate the level of effort required to complete our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. Under the proportionate performance method, periodic revenue related to up-front license payments is recognized as the percentage of actual effort expended in that period to total effort expected for all of our performance obligations under the arrangement. Actual effort is generally determined based upon actual direct labor hours, or FTEs, incurred and include research and development activities performed by internal scientists. Total expected effort is generally based upon the total projected direct labor hours. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we expect to complete the related performance obligations. In the event that a change in estimate occurs, the change will be accounted for using the cumulative catch-up method which provides for an adjustment to revenue in the current period. Estimates of our level of effort may change in the future, resulting in a material change in the amount of revenue recognized in future periods, including negative revenue in some periods. Generally, under collaboration arrangements, payments received during the period of performance may include up-front payments, time-or performance-based milestones and reimbursement of internal and external costs. The proportion of actual performance to total expected performance is applied to these payments in determining periodic revenue but will be limited by the aggregate cash received or receivable to date. Substantive milestone payments are recognized upon achievement of the milestone. Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. Under the terms of the Janssen Agreement, we granted Janssen exclusive worldwide rights to develop and commercialize products that contained one or more of our drug candidates for the treatment of HCV, namely odalasvir, a second-generation NS5A inhibitor, ACH-3422, a NS5B HCV polymerase inhibitor, and sovaprevir, a NS3/4A HCV protease inhibitor. In May 2015, we also entered into a parallel transaction with Janssen’s affiliate, JJDC, Inc., or JJDC, pursuant to which JJDC purchased 18,367,346 shares of our common stock at a price of $12.25 per share, for an aggregate purchase price of $225.0 million pursuant to a stock purchase agreement, or the JJDC Stock Purchase Agreement. In connection with the purchase of the shares, we and JJDC also entered into an investor agreement, or the Investor Agreement, on July 1, 2015 governing specified rights and obligations of JJDC with respect to its ownership of such shares. Pursuant to the terms of the Janssen Agreement, we were required to provide technology transfer services related to the chemistry, manufacturing and know-how to Janssen for up to 180 days after the effective date of the agreement. In accordance with ASC 605-25, which provides guidance on accounting for multiple-element arrangements, including the determination of the units of accounting and allocation of total arrangement consideration, we identified all of the obligations at the inception of the Janssen Agreement. The significant obligations were determined to be the license and the technology transfer services. We determined that license and technology transfer services represented a single unit of accounting because they were not viewed to have standalone value. The Janssen Agreement entered into by us and Janssen, and the JJDC Stock Purchase Agreement and the Investor Agreement, which were entered into by us and Janssen’s affiliate, were entered into in contemplation of each other. The only upfront amount received by us in exchange for the license and technology transfer services and the issuance of the shares was the $225.0 million. We determined that the amount received in excess of the fair value of the shares upon issuance of $66.1 million was attributed to the license and technology services. We also determined that there was no discernable pattern in which the 82