Accounting Spotlight June 24, 2019 1 FASB Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606). 2 For a full list of final ASUs issued by the FASB to amend and clarify the guidance in ASU 2014-09, see Section 19.2.2 of Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard. The guidance in ASU 2014-09, as amended, is codified primarily in FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers, and FASB Accounting Standards Codification Subtopic 340-40, Other Assets and Deferred Costs: Contracts With Customers. The Spotlight series is prepared by members of Deloitte’s National Office. New issues in the series are released as developments warrant. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte“ means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2022 Deloitte Development LLC. All rights reserved. The effective date of the highly anticipated revenue recognition standard, Accounting Standards Codification Topic 606: Revenue from Contracts with Customers (“ASC 606”), has been modified. For public entities, the effective date began with fiscal years beginning after December 15, 2017. For all nonpublic entities, the effective date is for fiscal years beginning after December 15, 2018, however, ASU 2020-05 extends by one year the effective date for all private entities that have not issued their financial statements. ASC 606 directs entities to recognize revenue when the promised goods or services are transferred to the customer. The amount of revenue recognized should equal the total consideration an entity expects to receive in return for the goods or services. The Financial Accounting Standards Board (FASB) created a five-step approach that entities should apply when determining the amount and timing of revenue recognition:
HCVT has published a series of articles discussing the various steps described above; this article briefly summarizes the guidance in Step 5, Recognize revenue when (or as) the entity satisfies a performance obligation – specifically the guidance around measuring a performance obligation over time. The fifth and final step in ASC 606 is to recognize revenue when or as the performance obligations are satisfied and the performance obligations are satisfied when control of the good or service has been transferred to the customer. This differs from the current revenue recognition standard, in which the transfer of risks and rewards triggers revenue recognition. ASC 606 defines control as “the ability to direct the use of and obtain substantially all of the remaining benefits from the asset” (ASC 606-10-20). Under the new standard, once the customer has control or, in other words, is able to direct the use of a good or service as well as obtain substantially all of the benefits from it, revenue should be recognized. Performance obligations that are fulfilled at a point in time are fulfilled when that obligation is satisfied. For performance obligations that are satisfied over time, the entity must decide how to appropriately measure the progress and completion of the performance obligation and recognize revenue accordingly. To be considered “over time”, the following criteria need to be met:
More complex judgments will be necessary when recognizing revenue from performance obligations satisfied over time. This concept will be commonly applied by contractors, service entities, and professional service organizations. It may also include manufacturing for certain specialized products made to customer specifications without alternative uses, such as in government contracting. For these types of performance obligations, a single method of measurement must be chosen that best depicts a reasonable and reliable measure of progress. An entity will use judgment when determining an appropriate method of measuring progress and must consider the nature of the promised good or service. In addition, only one method per performance obligation can be used, and that method must be applied consistently to similar performance obligations and in similar circumstances. Any subsequent change in the method used is considered a change in estimate. Methods of measuring progress toward complete satisfaction of a performance obligation include output methods and input methods. An output method looks at the fair market value of goods and services transferred to the customer to date. An input method will be based on the costs for labor and materials as the business incurs them. Measuring Progress – Output Methods Examples of output methods include, but are not limited to: (i) units produced; (ii) units delivered; (iii) amount of time elapsed; (iv) milestones reached; (v) survey of performance completed to date; and (vi) appraisal of results achieved. The list below includes examples of performance obligations satisfied over time and for which an output method would likely be appropriate.
Measuring Progress – Input Methods Conclusion About Sam Bachstein, Audit Partner Which of the following are key indicators that control of goods or services has been transferred to the customer?The following may be indicators that control has been transferred: The seller has a present right to payment. The customer has legal title to the asset. The seller has transferred physical possession.
What are the three criteria required to recognize revenue when goods and services are transferred over time?According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied: Risks and rewards of ownership have been transferred from the seller to the buyer. The seller loses control over the goods sold. The collection of payment from goods or services is reasonably assured.
What is a performance obligation and how is it used to determine when revenue should be recognized?A performance obligation is satisfied by transferring a promised good or service to a customer (IFRS 15.31). A good or service is transferred to a customer when they obtain control of that asset. A performance obligation can be satisfied (and revenue recognised) at a point in time or over time.
Does the customer simultaneously receive and consume the benefits provided by this performance obligation?The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs. The entity's performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.
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With respect to goods and services control has transferred to the customer if the customer
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