C.7 Step 5 — Recognize Revenue (Chapter 8 of the Roadmap)
C.7.1 Revenue Recognition Over Time
Because the guidance in ASC 606-10-25-27 on recognizing revenue
over time (specifically, the criterion in ASC 606-10-25-27(c)) introduces new
concepts, stakeholders have raised the following issues regarding whether an
entity should recognize revenue over time:
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Whether an entity that has recognized revenue at a point in time under legacy U.S. GAAP can be required to recognize revenue over time under the revenue standard.
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Whether the alternative-use assessment in ASC 606-10-25-27(c) should be based on the completed asset or the in-production asset.
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How and when an entity should determine whether it has an enforceable right to payment in accordance with ASC 606-10-25-27(c).
C.7.1.1 Recognition of Revenue That Has Historically Been Recorded at a Point in Time — Implementation Q&A 54 (Compiled From TRG Agenda Papers 56 and 60)
Revenue from certain contracts (e.g., production-of-goods
contracts) that has historically been accounted for on a point-in-time basis
may need to be accounted for over time under the revenue standard because
the goods in such contracts have no alternative use to the entity and the
entity has an enforceable right to payment. Each contract should be
evaluated, and an entity should not presume that it will continue to
recognize revenue at a point in time (or over time) because it did so under
legacy revenue guidance.
C.7.1.2 Alternative-Use Assessment — Implementation Q&A 55 (Compiled From TRG Agenda Papers 56 and 60)
The alternative-use assessment should be performed at contract inception and
should take into account the characteristics of the asset that will
ultimately be transferred to the customer.
C.7.1.3 Enforceable Right to Payment — Implementation Q&As 56 and 57 (Compiled From TRG Agenda Papers 56 and 60)
Depending on the facts and circumstances, an enforceable right to payment may
not be required before customization for the contract to qualify for revenue
recognition over time (e.g., an entity need not obtain an enforceable right
to payment for standardized raw materials needed in the final customized
product). In such circumstances, performance on the customer’s contract may
begin only once those standardized raw materials are placed into the
customization phase of the product. That is, for purposes of assessing
whether an enforceable right to payment exists, the customer’s contract may
begin only when the customization commences and continues through the final
completion of the product.
An entity should determine whether there is an enforceable right to payment
by using the contractual terms and relevant legal precedent regardless of
the entity’s history or intention of enforcing those terms.
Stakeholders have noted that private companies may not have the processes and
internal controls in place to obtain legal determinations for all revenue
contracts. There is no requirement in the revenue standard that companies
consult with legal counsel to determine whether there is an enforceable
right to payment. Implementation Q&A 57 states that “[i]n the [FASB]
staff’s view, a reasonable interpretation of the guidance is that when a
contract’s written terms do not specify the entity’s right to payment upon
contract termination, an enforceable right to payment is presumed not to
exist.”
C.7.2 Evaluating How Control Is Transferred Over Time — Implementation Q&A 51 (Compiled From TRG Agenda Papers 53 and 55)
Stakeholders have questioned whether an entity that is performing over time can
transfer control of a good or service underlying a performance obligation at
discrete points in time. Satisfaction of any of the requirements for recognition
over time implies that control is not transferred at discrete points in time.
Therefore, an entity’s use of an appropriate measure of progress should not
result in its recognition of a material asset (e.g., work in progress) for
performance the entity has completed. This is supported by paragraphs BC125,
BC128, BC130, BC131, BC135, and BC142 of ASU 2014-09, which clarify that control
of any asset (such as work in progress) is transferred to the customer as
progress is made.
There could be times when an entity may recognize an immaterial asset (e.g., work
in progress) under a recognition-over-time model because the entity’s selected
measure of progress may not perfectly match its performance.
C.7.3 Practical Expedient for Measuring Progress Toward Complete Satisfaction of a Performance Obligation — Implementation Q&A 46 (Compiled From TRG Agenda Papers 40 and 44)
Stakeholders have asked whether the invoice practical expedient may be used for
contracts in which the unit price or rate varies during the contract period. In
analyzing the question, the FASB staff referred to two examples: (1) a six-year
contract in which an electric power company sells energy to a buyer at rates
that increase every two years and (2) an IT outsourcing contract in which the
prices decrease over the contract period.20
The invoice practical expedient could be used for both contract examples because
the respective price and rate changes reflect the “value to the customer of each
incremental good or service that the entity transfers to the customer.”21 For the energy contract, the changing prices “reflect the value to the
customer because the rates are based on one or more market indicators”;22 and the changing prices in the IT outsourcing contract “reflect the value
to the customer, which is corroborated [through] (1) the benchmarking (market)
adjustment and (2) declining costs (and level of effort) of providing the tasks
that correspond with the declining pricing of the activities.”23
In addition, the FASB staff discussed up-front and back-end fees, noting that
while such fees do not preclude application of the invoice practical expedient,
entities must use judgment in determining whether the value of the fee to the
customer corresponds to the amount transferred to the customer.
C.7.4 Measuring Progress When Multiple Goods or Services Are Included in a Single Combined Performance Obligation — Implementation Q&As 47 and 48 (Compiled From TRG Agenda Papers 41 and 44)
Stakeholders have questioned:
- Whether an entity may apply more than one method to measure the progress of a performance obligation containing multiple goods or services that are bundled and recognized over time.
- How to measure progress toward satisfaction of a performance obligation involving a bundle of goods or services. For example, if multiple promised goods or services in a performance obligation are delivered in various periods, there are questions about how an entity should select a single method by which to measure progress for the respective goods and services.
A common (i.e., single) measure of progress is required for a single performance
obligation. Selecting a common measure of progress may be challenging when a
single performance obligation contains more than one good or service or has
multiple payment streams, and the selection is not a free choice. Further, while
a common measure of progress that does not depict the economics of the contract
may indicate that the arrangement contains more than one performance obligation,
it is not determinative.
C.7.5 Partial Satisfaction of Performance Obligations Before the Contract Is Identified — Implementation Q&As 53 and 76 (Compiled From TRG Agenda Papers 33 and 34)
Entities sometimes begin activities on a specific anticipated contract with
their customer before (1) they agree to the contract or (2) the contract meets
the criteria in step 1 of the revenue standard. The FASB staff refers to the
date on which the contract meets the step 1 criteria as the “contract
establishment date” (CED) and refers to activities performed before the CED as
“pre-CED activities.”24
The FASB staff noted that stakeholders have identified two issues with respect to
pre-CED activities: (1) how to recognize revenue from pre-CED activities and (2)
how to account for certain fulfillment costs incurred before the CED.
Once the criteria in step 1 have been met, entities should recognize revenue for
pre-CED activities that transfer a good or service to the customer on a
cumulative catch-up basis (i.e., record revenue as of the CED for all satisfied
or partially satisfied performance obligations) rather than prospectively
because cumulative catch-up is more consistent with the revenue standard’s core
principle.
Certain fulfillment costs incurred before the CED are capitalized as costs of
fulfilling an anticipated contract. However, these costs would be expensed
immediately as of the CED if they are related to progress made to date because
the goods or services constituting a performance obligation have already been
transferred to the customer. The remaining asset would be amortized over the
period in which the related goods or services will be transferred to the
customer.
C.7.6 Determining When Control of a Commodity Is Transferred — Implementation Q&A 50 (Compiled From TRG Agenda Papers 43 and 44)
Stakeholders have raised questions regarding the determination of when an entity
transfers control of a commodity. Specifically, they have questioned whether
revenue for delivery of a commodity should be recognized at a point in time or
over time. One of the criteria for recognizing revenue over time is the
customer’s simultaneous receipt and consumption of the benefits of the commodity
as the entity performs.25
Before evaluating the criteria in ASC 606-10-25-27, an entity will need to
consider all relevant facts and circumstances to determine the nature of the
promise to the customer in the contract. For example, the nature of a promise to
deliver a commodity on demand may differ from that of a promise to deliver a
specified quantity of a commodity into a customer’s storage. Implementation
Q&A 50 states that the relevant facts and circumstances to be considered
include “the inherent characteristics of the commodity, the contract terms, and
information about infrastructure or other delivery mechanisms.”
C.7.7 Measuring Progress Toward Complete Satisfaction of a Stand-Ready Performance Obligation — Implementation Q&A 49 (Compiled From TRG Agenda Papers 16 and 25)
Although ASC 606 does not permit an entity to use by default a straight-line
measure of progress based on the passage of time (because a straight-line
measure of progress may not faithfully depict the pattern of transfer), ASC 606
does not prohibit the use of a straight-line measure of progress, and such a
time-based method may be reasonable in some cases depending on the facts and
circumstances. An entity would need to use judgment to select an appropriate
measure of progress on the basis of the arrangement’s particular facts and
circumstances.
Example 18 in ASC 606-10-55-184 through 55-186 illustrates a health club
membership involving an entity’s stand-ready obligation to provide a customer
with one year of access to any of the entity’s health clubs. In the example, the
entity determines that the customer benefits from the stand-ready obligation
evenly throughout the year. Therefore, a time-based measure of progress is
appropriate.
Implementation Q&A 49 provides additional examples of stand-ready obligations
and discusses considerations related to selecting an appropriate measure of
progress as follows:
- Example A — An entity providing helpdesk support services does not know when a customer will call and require services. The customer benefits evenly throughout the period from the availability of the service. In addition, since the entity’s costs may be fixed throughout the term regardless of the level of activity from customers, a time-based input measure of progress may also result in the same pattern of recognition.
- Example B — An entity providing snow removal services does not know when it will snow, and the entity’s promise is to stand ready to provide services when and if it snows. However, the entity may conclude that because the likelihood of snow will fluctuate throughout the year, it should select a more reasonable measure of progress based on its expectation of increased efforts during winter months.
- Example C — An entity providing a cable television service does not know when the customer will access the content by using the entity’s service. The customer benefits evenly throughout the period from the availability of the service.
Implementation Q&A 49 notes that similarly, a software vendor may provide
unspecified updates or upgrades over a defined term but may not know when or to
what extent they will be made available. Because the customer benefits evenly
throughout the period from the promise that any updates or upgrades developed
will be made available to the customer, a time-based measure of progress is
generally appropriate.
Footnotes
20
Considered in TRG Agenda Paper 40.
21
Quoted from paragraph BC167 of ASU 2014-09. The FASB
staff also clarified that the phrase “value to the customer” has a
context in ASC 606-10-55-17 that differs from its context in ASC
606-10-55-18.
22
Quoted from Implementation Q&A 46.
23
See footnote 22.
24
Implementation Q&A 53 states that pre-CED activities
may include (1) “administrative tasks that neither result in the
transfer of a good or service to the customer, nor fulfill the
anticipated contract”; (2) “[a]ctivities to fulfill the anticipated
contract but which do not result in the transfer of a good or service,
such as set-up costs”; or (3) “[a]ctivities that transfer a good or
service to the customer at or after the CED.”
25
See ASC 606-10-25-27(a).