Chapter 8 — Step 5: Determine When to Recognize Revenue

8.6 Revenue Recognized at a Point in Time

If a contract does not meet the criteria for recognition of revenue over time, revenue should be recognized at a point in time. That is, an entity must first evaluate the criteria in ASC 606-10-25-27 for recognizing revenue over time (see Section 8.4). Only after determining that none of the criteria in ASC 606-10-25-27 are met can the entity conclude that it is appropriate to recognize revenue at a point in time. Then, the entity must determine the specific point in time at which it is appropriate to recognize revenue for the contract (i.e., when control of the goods or services is transferred to the customer).

ASC 606-10

25-30 If a performance obligation is not satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation, the entity shall consider the guidance on control in paragraphs 606-10-25-23 through 25-26. In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:

The entity has a present right to payment for the asset — If a customer presently is obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange
The customer has legal title to the asset — Legal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an entity retains legal title solely as protection against the customer’s failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset.
The entity has transferred physical possession of the asset — The customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls. Conversely, in some bill-and-hold arrangements, the entity may have physical possession of an asset that the customer controls. Paragraphs 606-10- 55-66 through 55-78, 606-10-55-79 through 55-80, and 606-10-55-81 through 55-84 provide guidance on accounting for repurchase agreements, consignment arrangements, and bill-and-hold arrangements, respectively.
The customer has the significant risks and rewards of ownership of the asset — The transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, an entity shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. For example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset.
The customer has accepted the asset — The customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. To evaluate the effect of a contractual customer acceptance clause on when control of an asset is transferred, an entity shall consider the guidance in paragraphs 606-10-55-85 through 55-88.

Connecting the Dots

As discussed in Section 8.2, an entity must assess whether its promised goods or services are transferred over time. If the entity determines that none of the criteria for recognizing revenue over time are met, it should recognize revenue at a point in time. To do so, the entity must determine the specific point in time at which control of the goods or services is transferred to the customer. When assessing the transfer of control, the entity should evaluate the point in time at which the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Specifically, this assessment should be performed from the customer’s perspective (i.e., the entity should identify when the customer obtains control of the asset, not when the entity relinquishes control of the asset).

In initial proposals of the revenue standard, some respondents disagreed with excluding risks and rewards from the standard. Specifically, paragraph BC154 of ASU 2014-09 states, “Respondents observed that risks and rewards can be a helpful factor to consider when determining the transfer of control, as highlighted by the IASB in IFRS 10, Consolidated Financial Statements, and can often be a consequence of controlling an asset.” Consequently, the boards decided to add risks and rewards as an indicator of control. Although risks and rewards may indicate that control has been transferred, it is important to remember that this is only an indicator and that an entity should consider other factors when determining whether revenue should be recognized.

Paragraph BC155 of ASU 2014-09 states that the indicators in ASC 606-10-25-30 (reproduced above) “are not a list of conditions that must be met before an entity can conclude that control of a good or service has transferred to a customer. Instead, the indicators are a list of factors that are often present if a customer has control of an asset and that list is provided to assist entities in applying the principle of control.”

The revenue standard does not require any one specific indicator or all of the indicators listed above to be present for an entity to conclude that revenue should be recognized at a point in time. In addition, each indicator may not in isolation be sufficient to demonstrate the transfer of control (as noted in, for example, ASC 606-10-25-30(c) with respect to physical possession of an asset). An entity may therefore need to perform a careful analysis when one or more indicators are not present and the entity believes that control has been transferred.

The implementation guidance in ASC 606-10-55 includes additional guidance on assessing the transfer of control in certain contexts, such as repurchase agreements, consignment arrangements, bill-and-hold arrangements, customer acceptance, and trial-and-evaluation arrangements. When it is appropriate to do so, an entity should apply this guidance in addition to considering the indicators in ASC 606-10-25-30.

8.6.1 Impact of Governing Laws on the Determination of When the Control of Goods Is Transferred to a Customer

Typically, an entity would recognize revenue for the sale of goods at the point in time when control is transferred to the customer. As discussed in Section 8.3.1, there are some instances in which it would be appropriate to recognize revenue for the transfer of goods over time. However, in instances in which the entity has concluded that point-in-time revenue recognition is appropriate, the timing of revenue may vary depending on the impact of governing laws. As a result, it is possible that the timing of revenue recognition could differ for the sale of the same good in different jurisdictions. The following are examples of the impact of governing laws:

As indicated in ASC 606-10-25-29 and ASC 606-10-55-14, laws that apply to a contract may affect whether an entity has an enforceable right to payment for performance to date and, consequently, whether revenue should be recognized over time.
In some jurisdictions, legal title, which is an indicator of the transfer of control in ASC 606-10-25-30, does not transfer until the customer obtains physical possession of the goods.
In some jurisdictions, property transactions (often residential property transactions) and distance sale transactions (such as sales via Internet, phone, mail order, or television) must include a period during which the customer has an absolute legal right to rescind the transaction (sometimes referred to as a “cooling off” period). For such transactions, it may be appropriate for entities to consider the guidance on whether a contract has been identified under ASC 606 and when customer acceptance occurs in determining the timing of revenue recognition.

8.6.2 Timing of Revenue Recognition When a Right of Return Exists

The example below illustrates the timing of revenue recognition when goods are sold to a distributor with a right of return and the distributor subsequently resells the goods to a retailer.

Example 8-11

Company LH is a manufacturer of specialized products that are each embedded with an activation chip. The products are sold through a distribution chain before ultimately being sold to the end customer. Company LH initially sells its products to Distributor D, an unrelated party that is LH’s customer. Title to and physical possession of the products are transferred to D upon delivery to its warehouse. In addition, D has the right to pledge any products within its possession as collateral. Once the products are delivered to D, LH no longer has the right to redirect the products (i.e., LH cannot require D to return the products so that LH can sell the products to another party).

Distributor D then separately negotiates with Retailer R to resell the products. Title to and physical possession of the products are transferred to R upon delivery of the products to R’s location. Upon receipt of the products, R activates the chip embedded in each of them. Once the chip embedded in a product is activated, R is able to sell the product to an end user.

Before activation, all parties in the distribution chain (i.e., R and D) have a general right of return related to the products. Once R activates the chip embedded in each product, the products may no longer be returned to LH. That is, LH retains some of the inventory risk (i.e., back-end inventory risk upon product returns) associated with the products until activation occurs. In addition, LH has only a right to payment for the products once the products are activated.

There are no specific acceptance terms in LH’s contracts to sell the products.

On the basis of the facts and circumstances, LH should not defer revenue recognition until the products are sold to and activated by R (i.e., recognize revenue on a sell-through basis). Rather, LH should recognize revenue when it transfers control of the products to its customer (i.e., D). As stated in ASC 606-10-25-25, “[c]ontrol 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.”

To help an entity determine whether control of an asset has been transferred to a customer, ASC 606-10-25-30 provides the following indicators:

Present right to payment — As noted above, LH does not have a right to payment for the products until R activates the chip embedded in each of them. This may indicate that control of the products is not transferred until the products are sold to R and the chip is activated.
Legal title — Legal title of the products is transferred from LH to D upon delivery of the products to D’s warehouse. Although R does not obtain legal title to the products until it obtains physical possession, this indicator focuses on when the entity’s customer obtains legal title. In the example, LH’s customer is D. Therefore, when LH evaluates this indicator, it should focus on when D obtains legal title (i.e., when LH relinquishes legal title to the products). This indicates that control of the products is transferred before the sale to and activation by R — specifically, when the products are delivered to D’s warehouse.
Physical possession — Physical possession of the products is transferred to D upon delivery of the products to D’s warehouse, which occurs before the products are sold to R. Further, in accordance with ASC 606-10-55-79 and 55-80, LH has determined that the sale of the products does not represent a consignment arrangement.
Significant risks and rewards of ownership — As discussed above, LH retains some of the inventory risk (i.e., back-end inventory risk related to product returns) associated with the products until R activates the chip embedded in each product. This is because D and R have a general right of return related to the products before activation. However, once the products are in D’s warehouse, LH no longer has the ability to redirect the products. Rather, D has the ability to sell the products to its own customers and the right to pledge any products within its possession as collateral. Therefore, most of the risks and rewards of ownership are transferred to D, but others are retained by LH.
Customer acceptance — As noted above, there are no specific acceptance terms in LH’s contracts to sell the products. However, D is deemed to have accepted the products upon delivery to D’s warehouse because this is the point in time at which title to and physical possession of the products are transferred to D.

Although LH retains certain risks associated with the products and is not entitled to payment until R activates the products, control of the products is transferred upon sale to D because this is the point in time at which LH no longer has the right to direct the use of the products and D obtains the right to direct the use of the products. In addition, LH does not have the ability to prevent D from directing the use of the products (i.e., by reselling the products to R). Company LH’s transfer of control is also supported by the fact that legal title to the products is transferred to D, which is one of the indicators of control in ASC 606-10-25-30. Further, D has the right to obtain substantially all of the benefits from the products not only through its ability to sell the products to R (or any other customer) but also through its ability to pledge the products as collateral. For these reasons, control of the products is transferred upon delivery of the products to D. Therefore, it would be inappropriate for LH to defer revenue recognition until the products are sold to and activated by R. However, LH should estimate the number of products that it expects will be returned to determine its transaction price in accordance with ASC 606-10-55-22 and 55-23.

8.6.3 Present Right to Payment for the Asset

ASC 606-10

25-30 [A]n entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:

The entity has a present right to payment for the asset — If a customer presently is obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange. . . .

The first indicator that control has been transferred for a performance obligation satisfied at a point in time is that the entity has a present right to payment for the asset (ASC 606-10-25-30(a)). If the customer is obligated to pay for the asset, this could be an indicator that control has been transferred to the customer. As discussed above, this is only an indicator and is not a requirement for an entity to conclude that control has been transferred to the customer and that the entity can recognize revenue.

8.6.4 Legal Title to the Asset

ASC 606-10

25-30 [A]n entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: . . .

b. The customer has legal title to the asset — Legal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an entity retains legal title solely as protection against the customer’s failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset. . . .

The second indicator that control has been transferred for a performance obligation satisfied at a point in time is that the customer has legal title to the asset (ASC 606-10-25-30(b)). The transfer of control typically coincides with the transfer of legal title. As illustrated in Section 8.6.4.1, there may be limited instances in which the entity retains legal title to the asset but is not precluded from recognizing revenue.

8.6.4.1 Retention of Title to Enforce Payment (Uniform Commercial Code)

In certain sales transactions, a seller may retain legal title to an asset after transferring physical possession of that asset to its customer. In some countries, it is common for a seller to retain a form of title until the customer makes payment so that the seller can recover the goods in the event of customer default on payment. In these instances, the seller’s retention of title does not affect the customer’s ability to direct the use of, or obtain substantially all of the remaining benefits from, the goods. Accordingly, it is appropriate in these circumstances for the seller to recognize revenue when the goods are delivered.

A core principle in ASC 606 (specifically, ASC 606-10-25-23) is that revenue is recognized “when (or as) [an] 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.” As stated in ASC 606-10-25-25, “[c]ontrol 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.”

In the circumstances described, control of the goods has been transferred from the seller to the customer even though title has not. Transfer of title may indicate that control of the asset has been transferred to the customer, but it is not determinative. ASC 606-10-25-30(b) specifically states that “[i]f an entity retains legal title solely as protection against the customer’s failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset.” Consequently, as long as other indicators demonstrate that control of the asset has been transferred to the customer, revenue should be recognized.

This may be the case even in the United States, where sales and other commercial transactions are subject to the Uniform Commercial Code (UCC). Under the UCC, the retention of legal title results in the seller’s retention of rights normally held by an owner of goods (such as the legal right to directly dispose of the goods and the right to prohibit the moving, selling, or other use of the goods). An entity must carefully evaluate the control indicators and the overall control principle in these circumstances to determine when control of a good is transferred to a customer.

The example below illustrates this concept.

Example 8-12

Company A is a global mining company whose products — primarily iron ore pellets — are used in the integrated steel industry. Company A’s contracts with its customers include a provision under which title to, and the risk of loss, damage, or destruction of, iron ore pellets are not transferred to the customer until receipt of payment. This clause is intended to be protective, and its main objective is to provide additional protection to A in the event of nonpayment. (For purposes of this example, assume that collectibility is not in question.) Under these arrangements, which are governed by the UCC, A will ship the iron ore pellets to the customer’s facility before receiving payment. Upon delivery of the iron ore pellets to the customer’s facility, A has a present right to payment (i.e., the customer cannot refuse or withhold payment for iron ore pellets that have been delivered). Because of the nature of the products (tons of iron ore), once the iron ore pellets have been delivered to the customer’s facility, it is not practical to physically redirect them to another location, and physical risk of loss is not substantive since the pellets are virtually indestructible. Once delivered, the pellets are indistinguishable from pellets at the customer’s location for which title has been transferred (i.e., payment has been made). In addition, the contract does not prohibit the customer from consuming the pellets before payment. That is, the customer can direct the use of, and obtain the benefits from, the pellets once the pellets are delivered to the customer’s location.

The table below provides an assessment of indicators that control has been transferred to the customer.

Notwithstanding that A retains legal title, it is appropriate for A to recognize revenue upon delivery of the iron ore pellets. In light of the assessment of the control indicators in the table above and an assessment of the control principle, control of the iron ore pellets is transferred from the seller to the customer upon delivery even though title is not transferred until payment is received. Given the nature of the product, greater emphasis should be placed on the physical possession and right to payment indicators because while A may retain the right to redirect or repossess the goods in the event that the customer does not pay, A does not have the practical ability to do so. In addition, the risk of loss is not meaningful in this scenario since the product is virtually indestructible. Further, the contract does not prohibit the customer from consuming the goods before payment, and because of the pellets’ physical location (i.e., at the customer’s location), the customer has the ability to use the pellets in its own production facilities. Therefore, from the customer’s perspective, the customer controls the iron ore pellets once the pellets are delivered to the customer’s location.

8.6.4.2 Evaluating Whether Control Has Been Transferred in a Sale of Real Estate Without a Formal Closing

In certain limited cases, control of real estate could be transferred to a customer even though a formal closing has not occurred. For example, if the escrow holder or trustee has received all consideration for the sale as well as the title to the property from the seller but the formal closing process has not been completed, the seller may record a sale as of the time the title was transferred if it has determined that (1) collectibility is probable, (2) it transferred control of the real estate to the buyer, and (3) it satisfied its performance obligations under the contract.

On the other hand, the lack of a formal closing (e.g., because of unresolved contingencies) may indicate that the seller has not fulfilled its performance obligations under the contract and therefore has not transferred control of the real estate.

Sometimes a sale of real estate will be structured so that title does not pass to the buyer until part or all of the consideration is received by the seller without recourse. For example, if the sale is structured as a “contract for deed,” title may not be transferred until the buyer’s obligation to the seller is paid in full. Generally, a seller may structure a sale as a contract for deed because of concern that the full sales price will not be collected. Recognition of revenue (or gains or losses on sales to noncustomers) would be inappropriate in this case if collectibility is not probable.

8.6.5 Transfer of Physical Possession of the Asset

ASC 606-10

25-30 [A]n entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: . . .

c. The entity has transferred physical possession of the asset — The customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls. Conversely, in some bill-and-hold arrangements, the entity may have physical possession of an asset that the customer controls. Paragraphs 606-10- 55-66 through 55-78, 606-10-55-79 through 55-80, and 606-10-55-81 through 55-84 provide guidance on accounting for repurchase agreements, consignment arrangements, and bill-and-hold arrangements, respectively. . . .

The third indicator that control has been transferred for a performance obligation satisfied at a point in time is that the entity has transferred physical possession of the asset to the customer (ASC 606-10-25-30(c)). The customer’s physical possession of the asset may indicate that the customer has obtained control of the asset. The standard, however, indicates that physical possession may not coincide with control of an asset. That is, in some arrangements (e.g., a contract with a repurchase agreement, or a consignment arrangement), the customer may have physical possession, but another aspect of the contract indicates that the entity still controls the asset. To the contrary, in a bill-and-hold arrangement, the entity may retain physical possession of the asset, but otherwise, the customer has obtained control. See Sections 8.7, 8.6.8, and 8.6.9 for further discussion of repurchase agreements, consignment arrangements, and bill-and-hold arrangements, respectively.

Connecting the Dots

Sometimes, an entity (e.g., a manufacturer) may sell goods to a reseller (e.g., distributor or retailer) that then resells the goods to end customers (e.g., consumers). In situations in which the reseller is the entity’s customer, the entity should recognize revenue when control of the goods is transferred to the reseller. However, in certain cases, the reseller may be restricted in its ability to resell the goods. Common examples include (1) seller-imposed restrictions (e.g., the entity contractually precludes the reseller from reselling the goods until a certain date or other event occurs) and (2) restrictions inherent in the goods (e.g., seasonal or other time-based restrictions not imposed by the seller).

When a reseller is restricted in its ability to resell a good purchased from an entity, the entity should consider the nature of the restriction when determining whether control of the good has been transferred to the reseller (i.e., the entity’s customer). Seller-imposed restrictions that affect the reseller’s ability to direct the use of and obtain substantially all of the remaining benefits from the good would suggest that control of the good has not been transferred to the reseller.

For example, if a seller transfers physical custody of a good to a reseller but does not permit the reseller to sell that good to a third party until some future date, and the underlying good does not have any benefit to the reseller other than through the resale of the good, it is likely that control of the good has not been transferred. That is, the reseller cannot direct the use of or obtain substantially all of the remaining benefits from the good. In such a case, the entity should not recognize revenue until the seller-imposed restriction lapses.

However, if the restriction is inherent in the good rather than imposed by the seller, the reseller may have obtained control of the good (since the restriction would be inherent in how and when the benefits of controlling the good are derived).

Example 8-13

Entity P, a publisher, ships copies of a new book to Entity R, a retailer. Entity P’s terms of sale restrict R’s right to resell copies of the book to its customers (i.e., end customers and other resellers) for several weeks to ensure a consistent release date across all retailers. Further, P has the right and ability to either shorten or extend the amount of time before R can resell copies of the book up to the release date. Entity P is required to recognize revenue when, after considering the indicators of control in ASC 606-10-25-30, it determines that control of the goods has been transferred to R.

Entity P should not recognize revenue until the time-based restriction lapses and R can resell copies of the book. Although R has physical possession of the copies, it does not have the ability to direct the use of and receive all of the remaining benefits from the copies since it is unable to resell them before the release date. Therefore, control of the copies has not been transferred to R.

Example 8-14

On January 1, Entity L, a clothing manufacturer, ships shorts and swimwear to Entity C, a retailer. Entity L does not explicitly restrict C from reselling the clothing until a certain date (i.e., there are no seller-imposed restrictions on the resale of the clothing). However, C decides not to make the clothing available for resale until March 1 because it has determined on the basis of its experience that consumers do not buy shorts and swimwear for the upcoming summer until March. Entity C believes that it would be more beneficial to continue to display jeans and sweaters during January and February.

Although C is restricted in its ability to resell the clothing until March 1, this restriction is due to the seasonal nature of the clothing, which is a restriction that is inherent in the good. Entity L concludes that control of the clothing is transferred to C on January 1. Therefore, L should recognize revenue from the sale of the clothing to C on January 1.

8.6.6 Significant Risks and Rewards of Ownership

ASC 606-10

25-30 [A]n entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: . . .

d. The customer has the significant risks and rewards of ownership of the asset — The transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, an entity shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. For example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset. . . .

The fourth indicator that control has been transferred for a performance obligation satisfied at a point in time is that the entity has transferred the significant risks and rewards of ownership to the customer (ASC 606-10-25-30(d)). While the revenue standard shifts from a risks-and-rewards-based approach to a control-based approach, the boards intentionally included the “customer has the significant risks and rewards of ownership of the asset” as an indicator because it is still a helpful factor in the determination of whether control has been transferred to the customer. In addition, it can often be a consequence of controlling the asset. This indicator was intended to provide additional guidance on determining whether control has been transferred to the customer and does not change the principle of determining whether the goods or services have been transferred to the customer on the basis of control.

8.6.7 Customer Acceptance

ASC 606-10

25-30 [A]n entity shall consider indicators of the transfer of control, which include, but are not limited to, the following: . . .

e. The customer has accepted the asset — The customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. To evaluate the effect of a contractual customer acceptance clause on when control of an asset is transferred, an entity shall consider the guidance in paragraphs 606-10-55-85 through 55-88.

The fifth and final indicator that control has been transferred for a performance obligation satisfied at a point in time is that the customer has accepted the asset (ASC 606-10-25-30(e)).

ASC 606-10

55-85 In accordance with paragraph 606-10-25-30(e), a customer’s acceptance of an asset may indicate that the customer has obtained control of the asset. Customer acceptance clauses allow a customer to cancel a contract or require an entity to take remedial action if a good or service does not meet agreed-upon specifications. An entity should consider such clauses when evaluating when a customer obtains control of a good or service.

55-86 If an entity can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon specifications in the contract, then customer acceptance is a formality that would not affect the entity’s determination of when the customer has obtained control of the good or service. For example, if the customer acceptance clause is based on meeting specified size and weight characteristics, an entity would be able to determine whether those criteria have been met before receiving confirmation of the customer’s acceptance. The entity’s experience with contracts for similar goods or services may provide evidence that a good or service provided to the customer is in accordance with the agreed-upon specifications in the contract. If revenue is recognized before customer acceptance, the entity still must consider whether there are any remaining performance obligations (for example, installation of equipment) and evaluate whether to account for them separately.

55-87 However, if an entity cannot objectively determine that the good or service provided to the customer is in accordance with the agreed-upon specifications in the contract, then the entity would not be able to conclude that the customer has obtained control until the entity receives the customer’s acceptance. That is because, in that circumstance the entity cannot determine that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service.

55-88 If an entity delivers products to a customer for trial or evaluation purposes and the customer is not committed to pay any consideration until the trial period lapses, control of the product is not transferred to the customer until either the customer accepts the product or the trial period lapses.

The significance of a customer acceptance clause in a contract can vary. For example, in some cases, a customer acceptance condition can be included as a substantive clause in a contract in which it is clear (perhaps even determinative) that without customer acceptance, control of the asset has not been transferred to the customer. In other circumstances, a customer acceptance provision may not be explicit in the contract, or customer acceptance may be objectively determinable by the entity even before shipment to the customer. Therefore, it is important for the entity to consider the facts and circumstances of the arrangement as it considers the control indicators and, in particular, the guidance on evaluating customer acceptance in the overall assessment of transfer of control. Particularly in circumstances in which the entity cannot objectively conclude that the customer has accepted the asset, the entity may not be able to conclude that control has been transferred to the customer.

The decision tree below illustrates the considerations relevant to customer acceptance provisions.

8.6.8 Consignment Arrangements

Although physical possession is an indicator that control has been transferred to the customer, ASC 606-10- 25-30(c) cautions that there are some arrangements in which physical possession may not be indicative of control. One example is a consignment arrangement.

ASC 606-10

55-79 When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers, the entity should evaluate whether that other party has obtained control of the product at that point in time. A product that has been delivered to another party may be held in a consignment arrangement if that other party has not obtained control of the product. Accordingly, an entity should not recognize revenue upon delivery of a product to another party if the delivered product is held on consignment.

55-80 Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following:

The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer, or until a specified period expires.
The entity is able to require the return of the product or transfer the product to a third party (such as another dealer).
The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).

Under ASC 606, products delivered to a consignee in accordance with a consignment arrangement generally are not sales and do not qualify for revenue recognition until the consignee sells the products to a third party, at which point control of the products is transferred from the consignor to the third party. It is not uncommon for the consignee to obtain flash title before title is transferred to the third party. Entities should use judgment and consider the indicators in ASC 606-10-55-80 to assess whether an arrangement is a consignment arrangement, particularly when the seller no longer has physical possession of goods but has retained control of such goods through its ongoing rights, such as its right to repossess the products or redirect the products to another party.

Connecting the Dots

The guidance in ASC 606-10-55-79 and 55-80 addresses consignment arrangements in which control of a product is not transferred to a consignee when the product is delivered to the consignee. However, that guidance does not address whether the consignee is acting as a principal or as an agent in the sale of the product to the end customer. Although it is possible that the consignee is acting as a principal, particularly if it obtains control of the product before the product is transferred to the end customer and is primarily responsible for the fulfillment of the product, entities should carefully evaluate all facts and circumstances in making that determination. See Chapter 10 for further discussion of principal-versus-agent considerations.

8.6.9 Bill-and-Hold Arrangements

Conversely to a customer in a consignment arrangement, a customer in a bill-and-hold arrangement may obtain control of the good before obtaining physical possession. Customers may request that arrangements be designed this way to meet certain needs. For example, a customer may have limited storage capacity or may not be able to immediately use the goods. Under such circumstances, the customer may request that the vendor hold the goods for some period, but the customer is nonetheless committed to purchase the goods.

ASC 606-10

55-81 A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future. For example, a customer may request an entity to enter into such a contract because of the customer’s lack of available space for the product or because of delays in the customer’s production schedules.

55-82 An entity should determine when it has satisfied its performance obligation to transfer a product by evaluating when a customer obtains control of that product (see paragraph 606-10-25-30). For some contracts, control is transferred either when the product is delivered to the customer’s site or when the product is shipped, depending on the terms of the contract (including delivery and shipping terms). However, for some contracts, a customer may obtain control of a product even though that product remains in an entity’s physical possession. In that case, the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the product even though it has decided not to exercise its right to take physical possession of that product. Consequently, the entity does not control the product. Instead, the entity provides custodial services to the customer over the customer’s asset.

55-83 In addition to applying the guidance in paragraph 606-10-25-30, for a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met:

The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement).
The product must be identified separately as belonging to the customer.
The product currently must be ready for physical transfer to the customer.
The entity cannot have the ability to use the product or to direct it to another customer.

55-84 If an entity recognizes revenue for the sale of a product on a bill-and-hold basis, the entity should consider whether it has remaining performance obligations (for example, for custodial services) in accordance with paragraphs 606-10-25-14 through 25-22 to which the entity should allocate a portion of the transaction price in accordance with paragraphs 606-10-32-28 through 32-41.

Example 63 — Bill-and-Hold Arrangement

55-409 An entity enters into a contract with a customer on January 1, 20X8, for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years.

55-410 Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On December 31, 20X9, the customer pays for the machine and spare parts but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity’s warehouse because of its close proximity to the customer’s factory. The customer has legal title to the spare parts, and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse, and the parts are ready for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years, and the entity does not have the ability to use the spare parts or direct them to another customer.

55-411 The entity identifies the promise to provide custodial services as a performance obligation because it is a service provided to the customer and it is distinct from the machine and spare parts. Consequently, the entity accounts for three performance obligations in the contract (the promises to provide the machine, the spare parts, and the custodial services). The transaction price is allocated to the three performance obligations and revenue is recognized when (or as) control transfers to the customer.

55-412 Control of the machine transfers to the customer on December 31, 20X9, when the customer takes physical possession. The entity assesses the indicators in paragraph 606-10-25-30 to determine the point in time at which control of the spare parts transfers to the customer, noting that the entity has received payment, the customer has legal title to the spare parts, and the customer has inspected and accepted the spare parts. In addition, the entity concludes that all of the criteria in paragraph 606-10-55-83 are met, which is necessary for the entity to recognize revenue in a bill-and-hold arrangement. The entity recognizes revenue for the spare parts on December 31, 20X9, when control transfers to the customer.

55-413 The performance obligation to provide custodial services is satisfied over time as the services are provided. The entity considers whether the payment terms include a significant financing component in accordance with paragraphs 606-10-32-15 through 32-20.

The example below illustrates how to determine whether it is appropriate to recognize revenue from the sale of a product in a bill-and-hold arrangement.

Example 8-15

Company A manufactures its product only after receiving noncancelable purchase orders. At the end of the reporting period, customers from whom noncancelable purchase orders have been received may not yet be ready to take delivery of the product for various reasons (e.g., insufficient storage space, sufficient supply of the product in the customer’s distribution channel, delays in the customer’s production schedule). Accordingly, at a customer’s request, A arranges to store the product either segregated in A’s own warehouse or in a third-party warehouse. While the product is in storage, A has risk of loss or damage to the product. In addition, A retains legal title to the product, and payment by the customer depends on delivery to a customer-specified site.

ASC 606-10-55-83 provides that to recognize revenue from the sale of a product in a bill-and-hold arrangement, an entity must meet the requirements in ASC 606-10-25-30 related to the transfer of control in addition to the bill-and-hold criteria in ASC 606-10-55-83. Indicators of the transfer of control applicable to bill-and-hold arrangements include the following (text quoted from ASC 606-10-25-30):

“The entity has a present right to payment for the asset.”
“The customer has legal title to the asset.”
“The customer has the significant risks and rewards of ownership of the asset.”
“The customer has accepted the asset.”

In this case, the customer is not presently obligated to pay for the product, A retains legal title, and the customer does not have the significant risks and rewards of ownership. Therefore, even if the entity meets the bill-and-hold criteria in ASC 606-10-55-83, the customer does not control the product, and revenue cannot be recognized.

8.6.10 Shipping Terms

For point-in-time revenue recognition, shipping terms may affect the point in time at which the entity recognizes revenue. Therefore, entities should carefully assess the indicators in ASC 606-10-25-30 to determine the point in time at which control transfers to the customer by considering the shipping terms in the contract. In addition to assessing step 5, entities should consider the guidance in step 2 of the revenue standard on determining the nature of the promises (i.e., identifying performance obligations), as outlined in Chapter 5. Specifically, step 2 addresses (1) the determination of when shipping and handling is a performance obligation and (2) the FASB’s related practical expedient.

If it is determined that revenue should be recognized at a point in time, an analysis of the shipping terms will form part of the assessment of when control passes. This is because shipping terms will typically specify when title passes and will typically also affect when the risks and rewards of ownership are transferred to the customer; accordingly, they will be relevant in the assessment of two of the five indicators of transfer of control listed in ASC 606-10-25-30.

When goods are shipped FOB shipping point, title passes to the buyer when the goods are shipped, and the buyer is responsible for any loss in transit. On the other hand, when goods are shipped FOB destination, title does not pass to the buyer until delivery, and the seller is responsible for any loss in transit.

8.6.10.1 Impact of Unspecified Shipping Terms

If a written sales contract does not explicitly set out shipping terms, the following should be taken into account in the determination of when control of the goods has been transferred to the customer:

The standard shipping terms in the jurisdiction and in the industry.
The legal environment of whichever jurisdiction governs the sale transaction.
The entity’s customary business practices, to the extent that they would be relevant to the contractual terms.

8.6.10.2 Goods Shipped FOB Destination but Shipping Company Assumes Risk of Loss

Generally, when goods are shipped with standard FOB destination shipping terms, control of the goods will be transferred to the customer when the goods arrive at the point of the agreed destination. However, entities should carefully consider both the terms of the contract and other relevant facts and circumstances to determine when control of the goods is transferred to the customer, especially when a contract contains other than standard shipping terms.

The example below illustrates how to determine whether it is appropriate to recognize revenue when goods are shipped FOB destination but a third-party shipping company assumes the risk of loss.

Example 8-16

Company A, which sells goods FOB destination (i.e., title does not pass to the buyer until the goods reach the agreed destination), is responsible for any loss in transit. To protect itself from loss, A contracts with the shipping company for the shipping company to assume total risk of loss while the goods are in transit.

Company A has not satisfied the performance obligation when the goods are shipped; the performance obligation is to provide the customer with the goods, whose title, risks and rewards of ownership, and physical possession will only be passed to the customer when the goods reach the agreed destination. Further, the fact that A has managed its risk while the goods are in transit by having a contract with the shipping company does not mean that it has transferred control of the goods to the customer at the time when the goods are shipped.

After performing the above analysis, A determines that control does not pass to the customer until the goods reach the agreed destination. Therefore, it is not appropriate for A to recognize revenue when the goods are shipped.

8.6.10.3 “Synthetic FOB Destination” Shipping Terms

Certain companies that ship goods use FOB shipping point terms but have practices or arrangements with their customers that result in the seller’s continuing to bear risk of loss or damage while the goods are in transit. If there is damage or loss, the seller is obligated to provide (or has a practice of providing) the buyer with replacement goods at no additional cost. The seller may insure this risk with a third party or “self-insure” the risk (however, the seller is not acting solely as the buyer’s agent in arranging shipping and insurance in the arrangements). These types of shipping terms are commonly referred to as “synthetic FOB destination” shipping terms because the seller has retained the risk of loss or damage during transit so that all of the risks and rewards of ownership have not been substantively transferred to the buyer.

In evaluating arrangements with synthetic FOB destination shipping terms, a seller would first be required to determine whether control of a promised good is transferred over time (in accordance with specific criteria provided in ASC 606); if control is not transferred over time, the performance obligation would be deemed to be satisfied at a point in time. Under ASC 606-10-25-30, if control of the good (promised asset) is transferred at a point in time, the seller would consider indicators in determining the point at which the customer obtains control of the asset. The seller would be required to use judgment in applying the guidance to evaluate the impact of shipping terms and practices on the determination of when control of the good is transferred to the customer.

Under typical, unmodified FOB shipping point terms, the seller usually has a legal right to payment upon shipment of the goods; title and risk of loss of/damage to the shipped goods are transferred to the buyer, and the seller transfers physical possession of the shipped goods (under the assumption that the buyer, not the seller, has the ability to redirect or otherwise control the shipment through the shipping entity). Shipping terms generally do not affect a customer acceptance term, which the seller would have to evaluate separately to determine its impact on when control of a good is transferred to the buyer. However, if the seller can objectively determine that the shipped goods meet the agreed-upon specifications in the contract with the buyer, customer acceptance would be deemed a formality, as noted in ASC 606-10-55-86. Therefore, under typical unmodified FOB shipping point terms, the buyer would obtain control of the shipped goods, and revenue (subject to the other requirements of ASC 606) would be recognized upon shipment.

The typical FOB shipping point terms as described above may be modified in such a way that a seller is either (1) obligated to the buyer to replace goods lost or damaged in transit (a legal obligation) or (2) not obligated but has a history of replacing any damaged or lost goods at no additional cost (a constructive obligation). Such an obligation is an indicator that the seller would need to consider in determining when the buyer has obtained control of the shipped goods. In these situations, the seller should evaluate whether the buyer has obtained the “significant” risks and rewards of ownership of the shipped goods even though the seller maintains the risk of loss of/damage to the goods during shipping. Such evaluation would include (1) a determination of how the obligation assumed by the seller affects the buyer’s ability to sell, exchange, pledge, or otherwise use the asset (as noted in ASC 606-10-25-25) and (2) a consideration of the likelihood and potential materiality of lost or damaged goods during shipping. The determination of whether the significant risks and rewards have been transferred would constitute only one indicator (not in itself determinative) of whether the buyer has obtained control of the shipped goods and should be considered along with the other four indicators in ASC 606-10-25-30. Recognition of revenue upon shipment (subject to the other requirements of ASC 606) would be appropriate if the seller concludes that the buyer has obtained “control” of the goods upon shipment (on the basis of an overall evaluation of the indicators in ASC 606-10-25-30 and other guidance in ASC 606) even if the seller retains some of the risks of the shipped goods.

Connecting the Dots

It is important to understand the shipping terms of an arrangement to determine when control of the good is transferred to the customer. This is because the shipping terms often trigger some of the key control indicators (e.g., transfer of title and present right to payment). Therefore, a careful evaluation of shipping terms is critical to the assessment of transfer of control.

While the fact that the customer has the significant risks and rewards of ownership is an indicator of control, that indicator may be overcome by the other indicators of control. As a result, it may be appropriate to recognize revenue upon shipment when the terms are FOB shipping point, even in instances in which the entity retains the risks associated with loss or damage of the products during shipment.

When FOB shipping point fact patterns are reassessed and control is determined to be transferred upon shipment, the seller should consider whether the risk of loss or damage that it assumed during shipping gives rise to another performance obligation (a distinct service-type obligation) that needs to be accounted for separately in accordance with the revenue standard. For example, such risk may represent another performance obligation if goods are frequently lost or damaged during shipping.

Further, entities should consider the practical expedient under U.S. GAAP (ASC 606-10- 25-18B, added by ASU 2016-10) that allows entities the option to treat shipping and handling activities that occur after control of the good is transferred to the customer as fulfillment activities. Entities that elect to use this practical expedient would not need to account for the shipping and handling as a separate performance obligation. Refer to Section 5.2.4.3 for additional information.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.