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ASC 606 ) Step5 :Recognize revenue as performance obligations are satisfied

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

Lets take a quick look on Step 5 which is Recognize revenue as performance obligations are satisfied

RECOGNIZE REVENUE AS PERFORMANCE OBLIGATIONS ARE SATISFIED

Finally, the business can recognize revenue when they meet the performance obligations.

If that fulfillment happens at a distinct point in time, revenue can be recognized right then.

If the obligation is satisfied over time—for example, a technical support contract—the business needs to decide how to measure the progress and completion of that obligation.

More details herewith:

Performance Obligations Satisfied Over Time – An entity will recognize revenue over time if any of the following criteria are met:

The customer concurrently receives and consumes the benefits provided by the entity’s performance as the entity performs.

  • The entity’s performance creates or enhances a customer-controlled asset.
  • The entity’s performance does not create an asset with an alternative use and the entity has a right to payment for performance completed to date.

Regarding the last bullet, a right to payment exists if an entity is entitled to payment for performance completed to date if the customer terminates the contract for reasons other than the entity’s nonperformance.

Performance Obligations Satisfied at a Point in Time – An entity will recognize revenue at a point in time (when control transfers) for performance obligations that do not meet the criteria for recognition of revenue over time.

To determine when a customer obtains control, the entity should consider the following indicators (not all indicators have to be met in order to recognize revenue):

  1. The entity has a present right to payment for the asset.
  2. The entity transferred legal title to the asset.
  3. The entity transferred physical possession of the asset.
  4. The entity transferred the significant risk and rewards of ownership to the customer.
  5. The customer accepted the asset.

Measuring Progress Toward Satisfying a Performance Obligations Satisfied Over Time

  • Output Methods – Units produced or delivered, contract milestones, or surveys of work performed.
  • Input Methods – Costs incurred, labor hours expended, time lapsed, or machine hours used.