3.5 Settling Litigation by Entering Into an Ongoing Business Relationship

An entity may recognize gains related to the settlement of litigation achieved by entering into an ongoing business relationship when the revenue recognition criteria for such a relationship have been met. Such a situation may exist when a litigation settlement agreement includes past obligations and disputes and modifies the ongoing contractual terms of the business relationship. When the contractual relationship is with a customer, the entity should apply ASC 606; otherwise, the entity may find it appropriate to apply ASC 610-20. In accounting for a litigation settlement that also includes a revenue element, an entity should consider bifurcating the settlement into its different elements, as described in an SEC staff speech at the 2007 AICPA Conference on Current SEC and PCAOB Developments (see Section 2.2.5 for further discussion).

In addition, regarding classification of the settlement, entities should consider the guidance in ASC 606 when making payments to a customer and in ASC 705-20 when receiving payments from a vendor. See Section 2.2.6.1 for further discussion.