Case Study Background
BioTek Co. (“BioTek”) is a biotechnology company that researches, develops, and manufactures proprietary enzymes, which it uses to develop drug compounds. Through collaborative arrangements, BioTek licenses these compounds to pharmaceutical companies that conduct clinical trials, obtain approval from the U.S. Food and Drug Administration (FDA), and eventually commercialize the drug.
On January 1, 2020, the Company enters into a collaborative arrangement (the “Agreement”) with Farma Co. (“Farma”) to bring a specific drug compound (Product A) to market. The Agreement grants Farma the following:
- A non-exclusive license (“research license”) to use BioTek’s proprietary enzyme, EnzymeBT, in the clinical trials for Product A. Farma needs EnzymeBT to produce and test Product A during clinical trials.
- 20 vials of EnzymeBT from BioTek. Although the research license allows Farma to manufacture the enzyme, the manufacturing process for EnzymeBT is specialized, and at present only BioTek has the necessary manufacturing capabilities.
- The option to purchase additional vials of EnzymeBT from BioTek as needed.
- A perpetual exclusive license (“commercial license”) to conduct clinical trials on Product A and commercialize the drug compound upon FDA approval.
- The option to purchase one additional exclusive commercial license for another drug compound (Product B), which is in the early stages of preclinical studies.
Control of the research license, commercial license, and vials of EnzymeBT transfers to Farma on January 1, 2020. In exchange, BioTek is entitled to receive the following amounts from Farma which, except in the case of defective vials, are not refundable once paid. Unless otherwise specified, assume all amounts are equal to the respective good’s standalone selling price (SSP):
- $5 million upfront fee for the license to use EnzymeBT. On a standalone basis, BioTek offers the license to use EnzymeBT for $10 million.
- $780,000 for the 20 vials of EnzymeBT. This amount includes an estimated cost of $30,000 plus a 30 percent markup for each vial of EnzymeBT. Farma may return any defective vials for a full refund1. This is the typical rate BioTek charges other customers.
- $39,000 for each additional vial purchased by Farma.
- Three $4 million milestone payments, for a total of $12 million, contingent on Farma’s progress towards commercializing Product A. BioTek estimates that milestones 1, 2, and 3 have a 90 percent, 30 percent, and 20 percent cumulative chance of success, respectively.
- $15 million upfront fee for the license to commercialize Product A.
- Royalty payments equal to 2 percent of net sales if Product A is FDA approved and commercialized. Potential lifetime sales are estimated at $250 million.
- If the optional commercial license for Product B is exercised, Farma must pay $5 million upfront plus royalty payments equal to 2 percent of net sales of Product B. On a standalone basis, the license is estimated to be worth $15 million upfront in addition to the 2 percent royalty fee. In other words, the option provides a $10 million discount.
Step 1: Identify the Contract with a Customer
BioTek should account for the collaborative arrangement under ASC 606 only if Farma meets the definition of a customer. This determination should first be made at the contract level. If any part of the contract is not with a customer, this determination should then be made in the context of each distinct good or service or distinct bundle of goods or services (i.e., unit of account). If Farma does not meet the definition of a customer in the context of a unit of account, that unit of account is not within the scope of ASC 606 and must be accounted for by another Topic, or, if outside the scope of any other Topic, by analogy to either ASC 606 or another Topic. If there is no appropriate analogy, then BioTek should apply a rational and consistent accounting policy election (ASC 808-10-45-3). Any consideration received from a party that is not considered a customer is not accounted for in accordance with ASC 606 and must be presented separately from revenue from contracts with customers. For more information, see Revenue from Collaborative Arrangements.
Farma is a customer if two criteria are met: (1) the goods or services in the transaction must be an output of BioTek’s ordinary activities, and (2) the transaction must be an exchange.
Goods or services must be an output of ordinary activities.
FASB Statement of Financial Accounting Concepts No. 6 (FASB Con 6) clarifies ordinary activities as an entity’s “ongoing and central activities.” In this case, BioTek’s ongoing and central activities include researching and developing enzymes and drug compounds. The consideration to which BioTek is due comes only as a result of these ongoing and central activities. Therefore, this criterion is satisfied.
Transaction must be an exchange.
The transaction between BioTek and Farma is an exchange2 because BioTek provides goods and services (e.g., licenses, enzymes, etc.) to Farma and receives promises of cash payments in return for each good or service. Therefore, this criterion is also satisfied.
Because both criteria are satisfied, BioTek determines that the entire arrangement is with a customer. For more information on determining whether a counterparty to a contract is a customer, refer to Definition of a Customer.
Five additional criteria, as listed in ASC 606-10-25-1, must also be met before a contract can be accounted for under ASC 606. BioTek determines that the contract meets these criteria because (1) BioTek and Farma approved the contract, (2) BioTek can identify each party’s rights, (3) BioTek can identify the payment terms, (4) the contract has commercial substance, and (5) it is probable that BioTek will collect substantially all of the consideration to which it will be entitled. For more information on these five criteria, see Identify the Contract and Collectibility of Consideration.
Step 2: Identify the Performance Obligations in the Contract
After determining that the collaborative arrangement is a contract under ASC 606, BioTek must identify the performance obligations in the contract with Farma. The following are the promised goods or services in the contract:
- Research license to use EnzymeBT
- 20 vials of EnzymeBT
- Option to purchase additional vials of EnzymeBT
- Commercial license for Product A
- Option to purchase one additional commercial license
Once the promised goods and services are identified, the Company must determine whether they are distinct. A promised good or service is distinct if both of the following criteria are met:
- The good or service is “capable of being distinct” (i.e., the customer can benefit from the good or service on its own or the customer can use the good or service with other readily available resources).
- The good or service is distinct “in the context of the contract” (i.e., the promised good or service is separately identifiable from other promises in the contract). BioTek should use the following indicators to make this assessment:
- The good or service is not used as an input by BioTek to produce a combined output as the end good or service to the customer.
- The good or service does not “significantly modify or customize” another good or service promised in the contract.
- The good or service is not “highly dependent” on another promised good or service in the contract. That is, other promised goods or services in the contract would not be significantly affected if the customer chooses not to purchase the good or service in question.
Refer to Distinct Within the Context of the Contract for additional information on assessing whether a good or service is distinct.
BioTek determines that two performance obligations exist in the Agreement:
Research License, Vials of EnzymeBT, and Commercial License
The research license is not capable of being distinct because Farma could not practically benefit from the license without the supply of EnzymeBT manufactured by BioTek. Although the license allows Farma to manufacture the enzyme, the manufacturing process is specialized, and only BioTek is presently capable of manufacturing the enzyme. Therefore, BioTek must bundle the research license and supply of EnzymeBT into a single performance obligation. Furthermore, BioTek must include the commercial license in this bundle because the commercial license is highly dependent on the research license and supply of EnzymeBT. That is, BioTek essentially promises Farma the research license, vials of EnzymeBT, and commercial license as a bundled set of goods. Farma would not purchase the commercial license for Product A without the promise of EnzymeBT because Farma could not conduct the necessary clinical trials toward commercialization of Product A without EnzymeBT.
Practitioners should note that the process of determining whether a license is distinct requires significant judgment, especially for licenses coupled with R&D, manufacturing services, or other activities undertaken by the licensor that significantly modify the underlying intellectual property (IP). For instance, when licenses are sold with R&D services, the stage of the R&D process could significantly impact the assessment of whether a license is distinct. A vendor may possess specialized knowledge and expertise during the initial discovery stage, and thus the customer is unlikely to have the necessary resources to benefit from the license without the vendor’s R&D service. In such situations, the vendor may need to combine the license with the R&D service to form a single performance obligation.
An option to obtain additional goods or services is a performance obligation if it conveys a material right. A right is material if it grants a discount that is significant and incremental to other discounts otherwise obtainable outside the contract (see Accounting Standards Update (ASU) 2014-09 Basis for Conclusions 387). In this contract, the option to purchase an additional commercial license is offered at a $10 million discount equal to the difference between the $5 million upfront fee in the contract and the $15 million estimated SSP. Although the $15 million SSP is assumed in this case, estimating the SSP of a commercial license in practice would require significant judgment, as pricing is likely to depend on the compound, market conditions, drug prospects, etc.
The $10 million discount is not typically offered to other customers and is therefore incremental. However, because the total cost of the license includes both an upfront fee and royalty payments, the significance of the $10 million discount relative to the total undiscounted price depends on the value of future royalty payments. In this example, 2 percent of the $100 million of estimated future sales is only $2 million. Together with the $15 million upfront fee, the total undiscounted price for the license would be $17 million. Relative to $17 million, the $10 million discount is clearly significant, although this assessment may require significant judgment in practice.
Because the $10 million discount is both significant and incremental to discounts otherwise obtainable outside the contract, the option to purchase an additional commercial license conveys a material right and is a performance obligation. For more information on customer options, see Customer Options for Additional Goods or Services.
Note that the option to purchase additional vials of EnzymeBT does not provide a material right because BioTek does not provide a discount to Farma. Therefore, the option to purchase additional vials of EnzymeBT is not considered a performance obligation.
Step 3: Determine the Transaction Price
Once BioTek has identified the performance obligations, it must determine the transaction price. The transaction price is the amount of consideration to which BioTek expects to be entitled in exchange for transferring goods and services to Farma. The transaction price may include fixed and/or variable amounts. While fixed amounts are included in the transaction price at their stated amounts, variable amounts must be estimated using either the expected-value approach or the most likely amount. The method that yields the most predictive result should be used.
In situations where either all or none of a payment will be received (i.e., a binary outcome), the most likely amount generally yields the most predictive result. When multiple outcomes are likely, the expected-value approach may be more appropriate. Once a method is used to generate an estimated amount, the estimate should be adjusted until it no longer contains amounts that are likely to be subject to a significant revenue reversal. For more information on variable consideration, refer to Variable Consideration and the Constraint.
Upfront Licensing Fees
Because the upfront research and commercial licensing fees are fixed and nonrefundable, both amounts—$5 million and $15 million, respectively—are included in the transaction price.
Vials of EnzymeBT
The consideration for the 20 vials of EnzymeBT is variable because Farma has the right to return any defective vials for a full refund. Although the right to return is used for illustrative purposes, in practice, similar contracts may require that defective vials be replaced (i.e., as part of a warranty) rather than returned, in which case the estimated cost of replacing defective vials would be recorded as a liability in accordance with ASC 460, Guarantees. To estimate the amount of expected variable consideration for transferring the 20 vials of EnzymeBT to Farma, BioTek uses the expected-value approach because Farma’s right to return may result in multiple outcomes. Based on historical defect rates, BioTek calculates the expected amount as follows:
|Number of Returns||Consideration Due||Probability||Weighted Amount|
|Total Expected Amount||$775,320|
If BioTek includes the expected amount of $775,320 in the transaction price, any future revenue reversal is not significant in terms of both likelihood and magnitude; therefore, the expected amount does not need to be constrained and the full $775,320 is included in the transaction price. When BioTek receives the full $780,000 upfront from Farma, a refund liability would be recognized for the $4,680 difference between the amount received and the amount included in the transaction price. BioTek also recognizes a refund asset of $3,600 ($4,680 x (1 – .27 gross margin)) for the difference between the cost of vials transferred to Farma and the expected cost of sales. For more information, see Rights of Return and Customer Acceptance.
If Farma exercises its option to purchase additional vials, each purchase creates a separate contract. Therefore, unlike variable consideration, any potential consideration from the purchase of additional vials is not included in the transaction price. For more information, refer to Variable Consideration Vs. Optional Purchases.
Milestone payments are variable consideration because they are contingent on future events. As milestones have binary outcomes, BioTek uses the most likely amount for its estimate of variable consideration. Therefore, only $4 million from the first milestone, which has a 90 percent probability of success, is included in the transaction price. Because the second and third milestones have a low chance of success (30 percent and 20 percent, respectively), BioTek would only include consideration for these milestones in the transaction price when a future revenue reversal becomes improbable. Probable is defined by U.S. GAAP as “likely to occur,” which is a threshold that is higher than “more likely than not” but lower than “virtually certain.”
Although the chance of success for each milestone has been provided in this case study, in practice, BioTek would likely consider the following in determining whether the probable threshold is met: (1) these payments are highly susceptible to factors outside of BioTek’s control (achieving these milestones likely depends on clinical outcomes and FDA approval), and (2) the timeframe of a typical drug-development process can be many years, so the uncertainty surrounding these payments may not be resolved for a long period of time. Each reporting period, BioTek should update its assessment of the likelihood of success for each milestone to reflect changes in facts and circumstances.
Entities should be aware that estimating variable consideration is an area of significant judgment under ASC 606. Although this example includes a portion of the milestone payments in the transaction price at contract inception, the decision in practice may require much more judgment, and the milestone payments may not be part of the contract transaction price when the contract begins. For example, when achievement of a milestone depends on factors outside an entity’s control, the entity may determine that a significant revenue reversal is likely to occur until the factors outside the entity’s control have passed. Even if the entity initially excludes milestone payments from the transaction price, the payments should be included once it becomes probable that the milestones will be achieved. This is a significant departure from ASC 605, as no revenue was recognizable if consideration was contingent on future events.
Royalty payments are generally considered variable consideration, which is estimated and included in the transaction price. However, sales- and usage-based royalties can qualify for an exception by which entities may exclude estimated royalty payments from the transaction price until the subsequent usage or sales occur. A sales- or usage-based royalty qualifies for this exception if (1) the royalty is strictly based on the licensee’s sales or usage, and (2) the license of IP is the sole or predominate performance obligation to which the royalty relates. For more guidance on this topic, see Sales- and Usage-Based Royalties.
In this contract, the sales-based royalty for Product A qualifies for the exception because the royalty is contingent solely upon Farma’s future sales of Product A, and the royalty relates predominantly to the commercial license (i.e., the royalty’s purpose is largely to compensate BioTek for transferring the commercial license to Farma). Consequently, BioTek would not include estimated consideration from the royalty payments in the transaction price at contract inception. Only when sales of Product A occur would BioTek include royalty payments in the transaction price. Although estimating the amount of consideration from royalty payments is not required at this step, an estimate may be necessary when allocating the transaction price in Step 4.
Future consideration that would be received upon option exercise is not included in the transaction price. However, as shown in Step 4, BioTek will allocate a portion of the contract’s transaction price to the option based on the option’s SSP.
After assessing each performance obligation in the arrangement, the transaction price at contract inception is $24,775,320, which includes the following amounts:
Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract
Once BioTek determines the transaction price, BioTek must allocate the transaction price to the performance obligations in the contract. The transaction price is allocated to each performance obligation based on its relative SSP after allocating the transaction price to any variable consideration and/or discounts.
Allocating Variable Consideration
Before using the relative SSP method, BioTek must determine whether any variable consideration qualifies for an exception to the standard allocation method. Under the exception, variable consideration is also allocated based on SSP, but it is only allocated to the part(s) of the contract to which it relates rather than to all performance obligations. This may include one or more performance obligations or one or more distinct goods or services in a series of distinct goods or services that make up a performance obligation. The latter possibility will be omitted from subsequent discussion because it does not apply to the case facts.
Three items in the arrangement contain variable consideration:
- The payment for the supply of EnzymeBT is variable because the customer may return defective vials.
- The R&D milestone payments are variable because these payments are contingent on Farma’s success in developing Product A.
- The sales-based royalty payments are variable because the royalty amount is dependent on Farma’s subsequent sales of Product A.
For each item that contains variable consideration, BioTek should determine whether the item relates to one or more, but not all performance obligations in the contract. Variable consideration relates to any performance obligation for which both of the following criteria are met:
- The variable consideration is connected to BioTek’s effort to satisfy the performance obligation (or to a specific outcome from satisfying the performance obligation).
- Allocating the variable consideration entirely to the performance obligation is consistent with the allocation objective when considering all performance obligations in the contract. The allocation objective is for BioTek to allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration expected for transferring the promised goods to Farma.
The variable consideration allocation exception is not optional; therefore, if both criteria are met for one or more, but not all performance obligations, variable consideration must be allocated to only those performance obligations rather than on a relative SSP basis. For more information, refer to Allocating Variable Consideration.
Vials of EnzymeBT
The $775,320 of estimated consideration for providing EnzymeBT to Farma meets both the above criteria. The first criterion is met because the consideration relates directly to BioTek’s effort to satisfy the first performance obligation (i.e., the performance obligation of bundled goods). The second criterion is also met because allocating the $775,320 to the first performance obligation is consistent with the allocation objective. That is, transferring the vials of EnzymeBT is part of the performance obligation, and the $775,320 amount reflects exactly the amount that BioTek expects to receive from satisfying that part of the performance obligation. Therefore, the $775,320 is allocated entirely to the first performance obligation. Although not considered in this case, BioTek would also need to evaluate the impact on allocation to the material right to ensure that the allocation objective is met for the entire contract.
While the R&D milestones do not constitute a performance obligation, the related consideration is variable and must be allocated. BioTek must therefore determine whether the milestone payments qualify for the variable consideration allocation exception.
The first criterion is met because the milestone payments directly relate to an outcome of satisfying the first performance obligation. The second criterion, which requires BioTek to consider whether the allocation objective of ASC 606 is met for the entire contract, requires significantly more judgment. Due to the complexity of such judgment, this case study will assume that the second criterion is also met, although in practice, BioTek would need to obtain confidence that the resulting allocation is reflective of the amounts BioTek expects to be entitled for satisfying each performance obligation in the contract. For more information on the second criterion, see the contrasting case studies in ASC 606-10-55-270 through 55-279.
Because both criteria are met, BioTek must allocate the variable consideration from milestone payments, which makes up $4 million of the transaction price, entirely to the first performance obligation.
As determined in Step 3, the royalty payments qualify for the sales-based royalty exception, which allows BioTek to temporarily exclude royalty amounts from the transaction price. Nevertheless, the royalty amounts, once realized, will still need to be allocated to performance obligation(s). Therefore, BioTek must determine whether the royalty payments meet the variable consideration allocation exception.
Royalty payments exchanged for a license often meet the criteria to be allocated exclusively to the license because the royalty payments connect exclusively to the entity’s efforts in transferring the license, and the royalty amount approximates the value expected for transferring the license. Indeed, BioTek concludes that the royalty payments do meet both criteria. The first criterion is met because the royalty payments directly relate to an outcome of satisfying the first performance obligation (commercialization of Product A). The second criterion is also met because the resulting allocation is consistent with the allocation objective. That is, the $5 million of estimated royalty payments (5 percent of an estimated $250 million lifetime sales of Product A) represent consideration that BioTek expects to receive for transferring the license. Although not considered in this case, BioTek would also need to evaluate the impact on allocation to the material right to ensure that the allocation objective is met for the entire contract.
Note that the above determination of the license’s SSP is simplified, and the determination is often much more complex in practice. For more information, see case study Estimating Standalone Selling Prices.
After BioTek has determined whether variable consideration qualifies for the allocation exception, BioTek should determine whether a discount, if present, qualifies for a similar exception. Like variable consideration, a discount should be allocated to one or more, but not all, performance obligations in the contract if the discount meets all the following criteria:
- All goods or services are regularly sold separately or as part of bundles on a stand-alone basis.
- The entity also regularly sells the separately sold good, service, or bundle at a discount.
- The normal discount of the separately sold good, service, or bundle is substantially the same as the overall discount offered in the contract.
Farma receives a discount if the combined SSP of all goods or services exceeds the transaction price. In BioTek’s contract with Farma, the combined SSP of all goods does exceed the transaction price, but the discount does not meet the above criteria because BioTek does not regularly sell these same goods at a similar discount. That is, the terms of this contract are customized and unique, as are most of BioTek’s contracts with customers. Because BioTek does not qualify for the discount allocation exception, BioTek must allocate the discount on a relative SSP basis, which occurs during the standard transaction price allocation approach, as shown in the following section.
For more information, see Allocating Discounts.
Allocating Based on Relative SSP
Allocation based on relative SSP begins by calculating a relative percentage for each performance obligation, which is equal to the SSP of the performance obligation relative to the total SSP of all performance obligations. This percentage for each performance obligation is then multiplied by the transaction price exclusive of amounts allocated by way of the variable consideration or discount allocation exceptions. The following table illustrates how the $20,775,320 transaction price (which excludes the $4 million allocated directly to the first performance obligation) is allocated to each performance obligation:
|Performance Obligation||SSP* (millions)||Relative Percentage||Transaction Price||Allocation||Milestone||EnzymeBT||Total Allocation|
|Licenses and EnzymeBT Vials||$30,780,000||75.5%||$20,000,000||$15,095,635||$4,000,000||$775,320||$19,870,955|
For more information on allocating the transaction price, refer to the case study Transaction Price Allocation.
Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation
Entities can recognize revenue either over time or at a point in time depending on when performance obligations are satisfied. A performance obligation is satisfied when control of the associated good(s) or service(s) is transferred to the customer. If control of the good(s) or service(s) is transferred over time, revenue related to that performance obligation is recognized over time; otherwise, revenue is recognized when control is transferred at a point in time. BioTek evaluates each performance obligation as follows:
Research License, Vials of EnzymeBT, and Commercial License
The pattern of revenue recognition for licenses of IP depends on whether the license is a right-to-use or a right-to-access license. In this example, the research and commercial licenses are right-to-use licenses because the underlying IP of both licenses has significant standalone functionality (i.e., EnzymeBT and Product A are functional IP), and neither EnzymeBT nor Product A is expected to change during the licensing period. For more information on accounting for licenses, see Licenses for Intellectual Property.
BioTek would normally recognize consideration received for its right-to-use licenses at a point in time when control of the licenses transfers to Farma. However, because the licenses and vials of EnzymeBT are bundled, BioTek must evaluate the nature of the entire performance obligation. Since the research and commercial licenses do not provide a benefit to Farma without BioTek’s ability to manufacture EnzymeBT, the performance obligation is not satisfied until BioTek’s manufacturing services are also complete. However, because the contract requires that BioTek manufacture only 20 vials of EnzymeBT, and control of all vials transfers to Farma at contract inception, BioTek’s performance obligation to transfer control of the licenses and the vials of EnzymeBT is satisfied entirely at contract inception. Therefore, all consideration allocated to the performance obligation is recognized at contract inception. Notably, the option for Farma to request more vials in the future does not extend BioTek’s obligation because the option, if exercised, constitutes a separate contract.
At the end of each reporting period, BioTek would update the estimated transaction price for this performance obligation as uncertainties related to variable consideration resolve. That is, Farma may notify BioTek that none of the 20 vials were defective, in which case BioTek would reverse its $4,680 refund liability and recognize revenue for the same amount. Likewise, BioTek would reverse its $3,600 refund asset and recognize an equivalent amount for cost of sales.
Similarly, if BioTek determines that a significant revenue reversal is no longer probable for either of the two remaining milestone payments, BioTek should include the milestone payment(s) in the transaction price and allocate them directly to this performance obligation (rather than on a relative SSP basis, as determined in Step 4). Revenue is recognized immediately because BioTek already satisfied the performance obligation at contract inception.
Estimated royalty payments are not included in the transaction price until sales occur. Therefore, BioTek does not recognize revenue from the sales-based royalty until Farma begins to sell Product A. When sales of Product A occur, BioTek includes the royalty amounts in the transaction price, which is then allocated based on the relative SSPs of the performance obligations. Because both performance obligations are already satisfied when sales of Product A occur, revenue is recognized immediately.
Consideration allocated to the customer option is recognized as revenue when either the option expires or Farma exercises the option and obtains control of the additional commercial license.
Collaborative arrangements, particularly in the biotechnology space, often involve significant judgment during each step of the revenue recognition model. This case study highlights a few of the difficult issues, such as determining if a counterparty is a customer, identifying whether a license is a distinct good, estimating and allocating variable consideration, and determining the correct timing of revenue recognition when a performance obligation involves multiple goods or services. Many issues, such as estimating the likelihood of royalty and milestone payments or determining the SSP of licenses and material rights, were simplified and would likely involve significantly more judgment in practice. Entities should fully understand the substance and rationale behind each part of a collaborative arrangement prior to accounting for the transaction in accordance with ASC 606.
- ASU 2018-18: “Collaborative Arrangements (Topic 808).”
- EY Financial Reporting Developments, “Revenue from contracts with customers.”
- KPMG Handbook, “Revenue recognition.”
- Deloitte Roadmap Series, “A Roadmap to Applying the New Revenue Recognition Standard.”
- PwC Accounting guide, “Revenue from contracts with customers.”
- The right to return is used for illustrative purposes. In practice, similar contracts may require that defective vials be replaced (i.e., as part of a warranty) rather than returned, in which case the estimated cost of replacing defective vials would be recorded as a liability in accordance with ASC 460, Guarantees.
- ASC Master Glossary defines an exchange as “a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.”