1.4 Step 1: Identify the Contract With the Customer (Chapter 4 of the Roadmap)

A contract can be written, verbal, or implied; however, the guidance applies to a contract only if all of the following criteria are met:

• “The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.”
• “The entity can identify each party’s rights regarding the goods or services to be transferred.”
• “The entity can identify the payment terms for the goods or services to be transferred.”
• “The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).”
• “It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.”

Stakeholders should be aware that under U.S. GAAP, the “probable” threshold for collectibility as used in the criterion above for identifying the contract with the customer is defined differently from how it is defined under IFRS Accounting Standards. In U.S. GAAP, ASC 450-20 (formerly FASB Statement 5) states that the term “probable” refers to a “future event or events [that] are likely to occur.” In IFRS Accounting Standards, “probable” means “more likely than not.” Because “more likely than not” under U.S. GAAP is a lower threshold than “probable,” an entity may encounter differences between U.S. GAAP and IFRS Accounting Standards in determining whether a contract exists. For more discussion on differences between U.S. GAAP and IFRS Accounting Standards, refer to Appendix A.

If a contract does not meet these criteria at contract inception, an entity must continue to reassess the criteria to determine whether they are subsequently met. If the above criteria are not met in a contract with a customer, the entity is precluded from recognizing revenue under the contract until the consideration received is nonrefundable and one or more of the following events have occurred:

• All of the performance obligations in the contract have been satisfied, and substantially all of the promised consideration has been received.
• The contract has been terminated or canceled.
• The entity (1) has transferred control of the goods or services to which the consideration that has been received is related, (2) has stopped transferring goods or services, and (3) has no obligation to transfer additional goods or services.

If none of the events above have occurred, any consideration received would be recognized as a liability.