The financial obligations imposed on US opioid manufacturers and distributors under New York's recently enacted Opioid Stewardship Act (OSA) has raised questions about how to account for payments made under the Act. This Alert addresses the OSA's financial reporting considerations.

Background

On April 12, 2018, New York Governor Andrew Cuomo signed the OSA into law. The OSA establishes an Opioid Stewardship Fund of $100 million to be collected annually and used in the fight against the opioid epidemic. The Opioid Stewardship program requires all manufacturers and distributors of controlled substances that are licensed by the New York State Department of Health (NYS DOH) to report transaction information for all opioids sold or distributed to or within New York State. The NYS DOH will use this information to determine annually each licensed manufacturer or distributor's ratable share of the $100 million stewardship fund. As the stewardship obligation is not based on income, but rather morphine milligram equivalents (MME) of opioids sold or distributed, the expense is accounted for as part of pre-tax income.

Overview of reporting requirements and payments

The OSA establishes that the initial year's payment will be based upon MME of opioids sold or distributed in New York State in calendar year 2017. For 2017 sales and distributions, licensed manufacturers and distributors are required to furnish their report of transactions by August 1, 2018.

The NYS DOH will compile the data submitted by all licensed manufacturers and distributors to determine each company's license payment percentage and resulting ratable share of the annual stewardship fund. The NYS DOH will provide this information to licensed manufacturers and distributors annually by October 15, with the initial year's information provided by October 15, 2018. The payment based on calendar year 2017 MME transaction activity is due January 1, 2019.

For subsequent years, company reports will be due on April 1 (e.g., 2018 report will be due April 1, 2019). Payments will be made by the first day of each quarter based upon the prior year's MME transaction activity (e.g., payments will be made on April 1, 2019, July 1, 2019, October 1, 2019 and January 1, 2020, based on calendar year 2018 MME transaction activity). Prior to the NYS DOH furnishing the license payment percentage for the year, the quarterly payments will be estimates, presumably with the subsequent payments adjusted once the final percentage is available.

Accounting implications

ASC 450, Contingencies

With New York imposing the stewardship obligation based on prior-year transaction information, a question has been raised as to whether the enactment of the OSA results in financial statement recognition and/or disclosure of loss contingency in accordance with ASC 450.1

ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence:

— Probable — the future event or events are likely to occur

— Reasonably possible — the chance of the future event or events occurring is more than remote but less than likely

— Remote — the chance of the future event or events occurring is slight

ASC 450 requires an estimated loss to be accrued by a charge to income if it is both probable that a liability has been incurred (or an asset has been impaired) at the date of the financial statements and the amount of the loss can be reasonably estimated.

ASC 450 also requires disclosure of the nature of a contingency when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. For contingencies that meet the threshold for disclosure, companies are required to disclose:

— The nature of the contingency

— An estimate of the possible loss or range of loss or a statement that such an estimate cannot be made

Each company should review its facts and circumstances to determine whether it is subject to the recently enacted New York State OSA. Companies should assess whether it is probable that they have incurred a liability and, if so, whether the company's ratable share of the stewardship fund can be reasonably estimated to determine whether an accrual is warranted. Companies should also assess the adequacy of their disclosures.

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RELATED RESOURCES

— For more information about EY's Tax Accounting services, visit us at www.ey.com/US/TaxAccounting
— For more information about EY's Tax Accounting University education program for clients, visit us at www.ey.com/TAU

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