14.5 Receivables | DART – Deloitte Accounting Research Tool

ASC 606-10

45-4 A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. For example, an entity would recognize a receivable if it has a present right to payment even though that amount may be subject to refund in the future. An entity shall account for a receivable in accordance with Topic 310 and Subtopic 326-20. Upon initial recognition of a receivable from a contract with a customer, any difference between the measurement of the receivable in accordance with Subtopic 326-20 and the corresponding amount of revenue recognized shall be presented as a credit loss expense.

The revenue standard was not intended to change either the timing of receivable recognition or the subsequent accounting for receivables. While both contract assets and receivables are similar in that they represent an entity’s right to consideration, the risks associated with each differ. As noted in Section 14.1, receivables are only exposed to credit risk since only the passage of time is required before receivables are due. However, contract assets are exposed to both credit risk and other risks (e.g., performance risk).

An entity could have a present and unconditional right to payment, and therefore a receivable, even if there is a refund obligation that may require the entity to pay consideration to a customer in the future (e.g., when a product is returned, or when rebates are earned on a specified volume of purchases). Since refund obligations give rise to variable consideration, they could affect the transaction price (see Section 6.3.5.2) and the amount of revenue recognized. However, an entity’s present right to consideration may not be affected by the potential need to refund consideration in the future. Consequently, in certain circumstances, a gross receivable could be recorded along with a liability. This is discussed further in paragraph BC326 of ASU 2014-09 and is illustrated in the following example from ASC 606:

ASC 606-10

Example 40 — Receivable Recognized for the Entity’s Performance

55-291 An entity enters into a contract with a customer on January 1, 20X9, to transfer products to the customer for $150 per product. If the customer purchases more than 1 million products in a calendar year, the contract indicates that the price per unit is retrospectively reduced to $125 per product.

55-292 Consideration is due when control of the products transfer to the customer. Therefore, the entity has an unconditional right to consideration (that is, a receivable) for $150 per product until the retrospective price reduction applies (that is, after 1 million products are shipped).

55-293 In determining the transaction price, the entity concludes at contract inception that the customer will meet the 1 million products threshold and therefore estimates that the transaction price is $125 per product. Consequently, upon the first shipment to the customer of 100 products the entity recognizes the following.

55-294 The refund liability (see paragraph 606-10-32-10) represents a refund of $25 per product, which is expected to be provided to the customer for the volume-based rebate (that is, the difference between the $150 price stated in the contract that the entity has an unconditional right to receive and the $125 estimated transaction price).

Connecting the Dots

At the April 2016 FASB-only TRG meeting, the FASB staff noted that it has received questions about the point in time at which a receivable should be recorded under a contract with a customer (including when contract assets would be reclassified as accounts receivable). The FASB staff agreed that some confusion could have resulted from the wording in Example 38, Case B, of the revenue standard (reproduced in Section 14.2), which some believed was not aligned with the guidance that identifies a receivable as a right to consideration that is unconditional other than for the passage of time. Partly in response to stakeholders’ concerns acknowledged at the meeting, the FASB later issued ASU 2016-20, which contains guidance aimed at clarifying the timing of revenue recognition related to receivables (referred to in ASU 2016-20 as “Issue 9”). See Section 18.3.3.6 for further information about the ASU’s clarifications related to Issue 9.

At the TRG meeting, the staff also noted that it has received other questions, including inquiries about situations in which performance occurs over time and whether receivables should be recorded as performance occurs or when amounts are invoiced and due. The staff observed that there is diversity in practice today regarding how and when receivables are recorded and that such diversity is not likely to be eliminated under the revenue standard. However, the staff reiterated that these questions do not affect revenue recognition; rather, they affect the presentation of assets on an entity’s balance sheet.

The example below illustrates how an entity that satisfies its sole performance obligation in a contract with a customer and plans to invoice the customer in multiple annual installments should reflect the transaction on its balance sheet.

Example 14-2

On March 1, 20X1, Entity A enters into a contract with one performance obligation (software license that is determined to be satisfied at a point in time on March 1, 20X1) for $3,600. Entity A delivers the software license on March 1, 20X1, and will invoice the customer in three equal and annual installments of $1,200 on March 1 of 20X1, 20X2, and 20X3. Payment is due by April 1 of each year.

Entity A should record a receivable for the full contract amount ($3,600) when it satisfies the performance obligation on March 1, 20X1. That is, the $3,600 should be recorded as a receivable in accordance with ASC 606-10-45-4, which states that a “receivable is an entity’s right to consideration that is unconditional” and a “right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.” As noted in paragraph BC323 of ASU 2014-09, “making the distinction between a contract asset and a receivable is important because doing so provides users of financial statements with relevant information about the risks associated with the entity’s rights in a contract. That is because although both would be subject to credit risk, a contract asset also is subject to other risks, for example, performance risk.” In this scenario, A’s rights are only subject to credit risk because the sole performance obligation has been satisfied as of March 1, 20X1 (i.e., A has an unconditional right to cash for the full contract amount).

The example below illustrates how an entity that satisfies its performance obligation over time in its contracts with customers and plans to invoice each customer with different payment terms should reflect the transactions on its balance sheet.

Example 14-3

On March 1, 20X1, Entity A enters into two identical (other than payment terms) noncancelable contracts with two different customers, Customer Y and Customer Z. The contracts each contain the same single performance obligation (i.e., cleaning services) that is satisfied over time. The transaction price is $2,400. Each customer is issued an invoice on March 1, 20X1, and A provides continuous service from March 1, 20X1, through February 28, 20X2. Customer Y’s payment is due on March 31, 20X1, but is received by A on April 15, 20X1. Customer Z’s payment is due on April 15, 20X1. There are multiple views on how A should reflect these transactions on its balance sheet as of March 31, 20X1:

Alternative A — Entity A should record a receivable when it issues an invoice to its customer and begins satisfying the performance obligation. The right to consideration is unconditional because only the passage of time up to the due date is required (since A has already begun performing the services). Accordingly, A’s transactions with Y and Z would be reflected in the financial statements as follows:
Alternative B — Until the invoice is due, A should build up its receivable balance incrementally as it satisfies its performance obligation. For Y, since payment is due on March 31, 20X1, the full receivable balance is recorded. For Z, the full receivable balance would be recorded once payment is due on April 15, 20X1. Accordingly, A’s transactions with Y and Z would be reflected in the financial statements as follows:

Discussions with the FASB staff confirmed that the Board did not intend to change practice related to when receivable balances are recorded. Depending on an entity’s existing accounting policies, either Alternative A or Alternative B could be acceptable.

Connecting the Dots

As further discussed in Section 14.7.1, contract assets and contract liabilities should be determined at the contract level (i.e., not at the performance obligation level), and only a net contract asset or net contract liability should be presented for a particular contract. Receivables, however, would be presented separately from contract assets and contract liabilities, as also discussed in that section. This issue is addressed in Q&As 61 through 63 (compiled from previously issued TRG Agenda Papers 7 and 11) of the FASB staff’s Revenue Recognition Implementation Q&As (the “Implementation Q&As”). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

Implementation Q&A 34 (compiled from previously issued TRG Agenda Papers 30 and 34) discusses the difficulty of determining when a customer paid for a particular good or service under a contract involving multiple promised goods or services because of the fungible nature of cash (see Section 7.7 for additional discussion about allocating cash payments to specific performance obligations). Since receivables are presented separately from contract assets and contract liabilities, the allocation of cash to performance obligations in a contract involving multiple performance obligations could also affect the recognition of receivables, contract assets, and contract liabilities. Consider the example below.

Example 14-4

On January 1, 20X1, Entity A enters into a noncancelable contract with a customer that contains two performance obligations: a software license (satisfied at a point in time) and a service (satisfied over time from January 1, 20X1, through December 31, 20X3). Entity A issues an invoice on January 1, 20X1, for the first year (due on February 1, 20X1) and subsequently issues an invoice on each anniversary for the next two years. The transaction price of the contract is $6,000 (invoiced at $2,000 per year). As a result of allocating the transaction price to each performance obligation on a relative stand-alone selling price basis, 60 percent of revenue ($3,600) is allocated to the license and 40 percent of revenue ($2,400) is allocated to the service. Contractually, each $2,000 invoice provides the right to receive service for one year ($800) and applies to one-third of the total license fee of $3,600 ($1,200). Entity A has the contractual right to bill and collect payment for the remaining license fee independent of providing any future service.

On January 1, 20X1, the software license is transferred to the customer and the service commences. The customer pays the $2,000 invoice in full on February 1, 20X1. Entity A has an accounting policy of recording the receivable when amounts are invoiced and the associated performance obligation has been satisfied or has commenced.

There are multiple views on how this transaction should be presented as of and for the period ended March 31, 20X1:

Alternative A — To identify the receivable amount in this contract, A must first allocate the payment made on February 1, 20X1, to the performance obligations contractually tied to the payment. Entity A would then determine the remaining receivable for performance obligations satisfied when payment is unconditional. Accordingly, the transaction would be reflected in the financial statements as follows:
Alternative B — Entity A would allocate cash entirely to the satisfied performance obligations (i.e., the software license and the satisfied portion of the service) and record the remaining consideration due that is associated with the satisfied performance obligations as a receivable. Consequently, as illustrated below, A would not present any contract liability for services paid for by the customer before performance.

Because cash is fungible and can be allocated at either the contract level or the performance obligation level, either Alternative A or Alternative B could be acceptable. Entities should apply a consistent approach for similar contracts and in similar circumstances.