Revenue Recognition Part Five: Recognize Revenue When Entity Satifies a Performance Obligation
By Benjamin R. Ripple, CPA, Partner
As everyone prepares to adopt the new revenue recognition standards, which are applicable for years beginning after December 15, 2017 for public companies and the following year for nonpublic companies, we are taking a deeper dive into each of the five steps of the revenue recognition process. Our goal is to make understanding the 700 page original Accounting Standard Update (ASU) and the seven subsequent standard updates a little easier.
You have finally made it! You have been through the other four steps of the new process, and you finally get to actually record some debits and credits for the contract with your customer. Congratulations on your perseverance and patience in the process. I assume you assume that this is the easy part, but FASB wouldn’t let you off the hook that easy. You still have to determine whether or not the performance obligation is satisfied at a point in time or over a period of time. The standard gives the following as criteria that would require recognition of revenue over time:
- The customer simultaneously receives and consumes the benefits provided as the entity performs.
- The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
- The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
Examples of revenue recognized over time would include renting real estate, construction of a building or piece of equipment that the client owns from the outset, or the always popular example of a magazine subscription (if anyone still subscribes to a magazine).
For revenue that is satisfied at a point in time, the step also gives guidance in determining when that time should be. Indicators given in the standard include the entity having right to payment for the asset or service, the customer having legal title to the asset, transferring physical possession of an asset, transferring risk and reward of ownership, and the customer accepting the asset. This should not be much of a change from how you are currently recognizing revenue.
If you need additional resources on understanding and implementing the standard, you have options. First, please reach out to your accounting service providers early to get on top of the implementation issue before it gets here. Second, FASB has setup the following website to help with transition to the new standard:
FASB/IASB Joint Transition Resource Group for Revenue Recognition
Whatever you do, please do not wait until the audit of the first period under the new standard to try to get this cleaned up. That will lead to a lot of headaches for you, your bankers, your accountants, and all of those people’s significant others that will have to deal with listening to them complain about the new revenue recognition process.
Benjamin R. Ripple Partner, Assurance Practice Leader, CPA
Ben is a partner in BRC’s assurance services. Since starting his career in 2001, Ben has worked with clients ranging from family-owned companies, to multinational corporations, to not-for-profit and governmental entities requiring A-133 audits. Ben’s industry experience includes: Manufacturing and distribution Hospitality, including restaurants and hotels Investment companies Governmental and not-for-profit entities Affordable housing […]