Breaking Down the Proposed New Revenue Recognition Standard: Step 5
In my previous blogs I have outlined the steps an entity would take to determine when and how much revenue to recognize for a contract under the proposed new standard and introduced steps one through four an entity would use in that process. Below I further our discussion by outlining step five.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Revenue is recognized as an entity transfers goods or services to a customer, and thus, has satisfied the performance obligation. The goods or services are transferred when the customer obtains control over those goods or services (for ex: takes title of the asset). An entity must determine if the performance obligation is satisfied over time (and therefore recognize revenue over time) or at a point in time (and therefore recognize revenue at that point in time). A performance obligation is satisfied over time if one of the following two criteria is met:
- The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced (for ex: work in process).
- The entity’s performance does not create an asset with an alternative use to the entity and at least one of the following criteria is met:
- The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs.
- Another entity would not need to substantially reperform the work the entity has completed to date if that other entity were to fulfill the remaining obligation to the customer.
- The entity has a right to payment for performance completed to date and it expects to fulfill the contract as promised.
While the effective date of the standard has not yet been determined, we do know that the effective date won’t be any earlier than for annual reporting periods beginning January 1, 2015 (with a minimum of one year later for nonpublic entities). Early adoption will not be permitted. The final standard may be issued in the first quarter of 2013.
Contact your Anders trusted advisor to learn more about how the proposed standard could affect your company.