1.2 Key Provisions of the Revenue Standard
The core principle and application of the standard’s revenue model can be
depicted as follows:
The core principle was established by the FASB and IASB and is the underpinning of the entire revenue
framework. In this principle, the boards identified and answered the two most fundamental questions
concerning revenue:
- When?
- That is, when may an entity recognize revenue?
- Answer — When the entity satisfies its obligations under a contract by transferring goods or services to its customer. That is, when the entity performs, it should recognize revenue.
- How much?
- That is, how much revenue may an entity recognize?
- Answer — The amount to which the entity expects to be entitled to under the contract (i.e., an expected amount, so estimates may be required). The boards intentionally used the wording “be entitled” rather than “receive” or “collect” to distinguish collectibility risk from other uncertainties that may occur under the contract (see Chapters 4 and 6 for further discussion).
The core principle is supported by five steps (following a scope decision) in
the standard’s revenue framework, which are outlined in the following chart: