8.2 Control
ASC 606-10
25-23 An entity shall recognize revenue when (or as) the entity satisfies a performance obligation
by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred
when (or as) the customer obtains control of that asset.
25-25 Goods and services are
assets, even if only momentarily, when they are received and
used (as in the case of many services). Control of an asset
refers to the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the asset.
Control includes the ability to prevent other entities from
directing the use of, and obtaining the benefits from, an
asset. The benefits of an asset are the potential cash flows
(inflows or savings in outflows) that can be obtained
directly or indirectly in many ways, such as by:
-
Using the asset to produce goods or provide services (including public services)
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Using the asset to enhance the value of other assets
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Using the asset to settle liabilities or reduce expenses
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Selling or exchanging the asset
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Pledging the asset to secure a loan
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Holding the asset.
ASC 606 applies a single model (based on control) to all revenue transactions to determine when
revenue should be recognized. ASC 606-10-25-25 defines control of an asset as “the ability to direct the
use of, and obtain substantially all of the remaining benefits from, the asset.” This definition consists of
three components:
- The “ability” — For an entity to recognize revenue, its customer must have the present right to direct the use of, and obtain substantially all of the remaining benefits from, an asset. That is, the entity should not recognize revenue until the customer has in fact obtained that right.
- “[T]o direct the use of . . . the asset” — This means that the customer can (1) use the asset in its own activities, (2) allow the asset to be used in another entity’s activities, or (3) restrict another entity from using the asset.
- “[A]nd obtain substantially all of the remaining benefits [from the] asset" — To obtain control, the customer must be able to obtain substantially all of the remaining benefits from the asset (e.g., by using, consuming, disposing of, selling, exchanging, pledging, or holding the asset).
Transfer of control can be assessed from both the customer’s and the seller’s perspective; however,
the FASB and IASB decided that control should be viewed from the customer’s perspective. While
the timing of revenue recognition could often be the same from both perspectives (i.e., when the seller
surrenders control and when the customer obtains control), assessing the transfer of control from the
customer’s perspective minimizes the risk of recognizing revenue for activities that do not align with the
transfer of the goods or services to the customer.
The notion of control is a relatively simple concept when applied to the transfer of control of a good to
the customer; however, for performance obligations related to services and construction-type contracts,
the notion of control may be less straightforward. For example, in arrangements in which the customer
simultaneously consumes the asset as the asset is created, the customer never recognizes an asset;
consequently, it may be more difficult to determine when the customer obtains control.
In developing the standard, the boards received feedback that there should be separate control
guidance for goods and services; however, as discussed above, the boards ultimately decided against
this because (1) it may sometimes be difficult to clearly define a service and (2) not all service contracts
result in the transfer of resources to customers over time. Rather, the boards focused on the attribute
of the timing of when a performance obligation is satisfied to determine whether control has been
transferred. This is discussed further in Section 8.3.
Connecting the Dots
The switch from a risks-and-rewards model to a control-based model is consistent with the
FASB’s overall shift in recent years toward a control-based model in other projects (e.g.,
consolidation, leases, and derecognition of financial assets). While the notion of control may be
defined slightly differently to take into account the specifics in each of these standards, the same
general concept of a control-based standard remains.
As illustrated in Section 8.1.3, a performance obligation
satisfied at a point in time is generally a product or good, and a
performance obligation satisfied over time is generally a service. However,
certain exceptions apply, and it is important not to automatically assume
that revenue from a product or good is recognized at a point in time and
revenue from a service is recognized over time. For example, revenue from
certain deliverables of what many may commonly consider to be goods (e.g.,
some contract manufacturing) may be recognized over time as revenue from a
manufacturing “service.” Depending on the payment terms, this may be the
case when the goods being manufactured are highly customized and do not have
an alternative use to the entity, thereby implying that the customer is
receiving a benefit over the manufacturing period, as opposed to only when
the finished goods are provided to the customer. Alternatively, revenue from
certain deliverables of “services” (e.g., under some construction contracts)
may need to be recognized at a point in time if it is determined that the
customer does not control the constructed asset until the end of the
construction process. Refer to Sections 8.3.1 and 8.3.2 for
illustrations of these concepts.