FASB Accounting Standards Codification Topic 606, Revenue from Contracts with Customers, provides a 5-step framework for determining revenue recognition. Our last installment in this series addresses Step 5 – recognizing revenue when the entity satisfies a performance obligation.
The first decision point in Step 5 is the determination of whether the entity satisfies the performance obligation at a point in time or over a period of time. To satisfy an obligation over time and accordingly recognize the revenue over that period of time, at least one of the following criteria must be met:
If a performance obligation is not satisfied over time, then revenue will be recognized at a point in time. The question is, when is that point in time? While there is not an all-inclusive list of criteria, considerations include whether the entity has right of payment and the customer has legal title to the goods, whether the customer has received physical custody, whether the customer has risks and rewards of ownership, etc. In addition, the entity needs to consider any ongoing warranties, right of return, or service obligations that would prevent an entity from recognizing revenue or a portion of revenue until after the transfer of custody.
Whether revenue is going to be recognized at a point in time or over a period of time, the entity needs to periodically update its evaluation of revenue recognition over the performance period for any change in circumstances.
Have questions? Please contact your Eide Bailly LLP representative today; we can help you through this process.
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Five Steps to Understanding the New Revenue Recognition Standards
Catch up on this series!
Revenue Recognition – Step 1: Identify the Contracts with a Customer
Revenue Recognition – Step 2: Identify the Performance Obligation in the Contract
Revenue Recognition – Step 3: Determine the Transaction Price
Revenue Recognition – Step 5: Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation
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