Once entities allocate the transaction price, they can then move to the fifth and final step of the new revenue recognition standard: recognizing revenue. Step 5 requires entities to recognize the consideration given for an asset when or as the performance obligation has been satisfied. This point occurs when the customer receives control of the good or service.

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A Serial on the New Revenue Recognition Standard
Once entities allocate the transaction price, they can
then move to the fifth and final step of the new revenue
recognition standard: recognizing revenue.
Step 5 requires entities to recognize the consideration
given for an asset when or as the performance
obligation has been satisfied. This point occurs when
the customer receives control of the good or service.
June 2016
Step 5: Recognizing Revenue as or When Performance Obligations are
Satisfied
Things to Consider
• Similar to current guidance, revenue is recognized
over time or at a point in time. Determining when to
recognize revenue will require the use of judgment.
• Unlike existing guidance, revenue is recognized
based on the transfer of control. Existing guidance
places an emphasis of risk and rewards of
ownership, which is one indicator to consider if
control has been transferred.
• Evaluating when revenue is recognized and on
what basis to recognize revenue will require an
understanding of the contractual arrangements
of an entity. Consider engaging legal expertise to
review the existing terms of contracts and whether
changes may be warranted.
• All entities will need to re-evaluate their pattern
of revenue recognition. Entities that currently
have specialized guidance, such as the software
industry and contractors may experience a greater
degree of change and should carefully evaluate
the new guidance to determine differences that
may exist under the new guidance.
Under the standard, control is defined as the
customer’s ability to have direct use of an asset and
reap substantially all of its benefits. Common signs of
control include:
• The entity providing the asset to the customer has
a right to payment;
• The legal title of the asset has been transferred to
the customer;
• The customer has physical control of the asset;
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5
Identify the contract(s) with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the performance
obligations in the contract.
Recognize revenue when (or as) the entity
satisfied a performance obligation.
• The customer is responsible for the asset’s risks;
and
• The customer has accepted the asset.
How and when entities recognize revenue, however,
depends on the nature of the performance obligation.
At inception of the contract, entities determine whether
performance obligations are satisfied over time or at a
point in time.

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Performance Obligations Satisfied Over Time
Performance obligations meeting any one of three
criteria are recognized over time; all other revenue
from contacts with customers are recognized at a
point in time.
Customers gain control of an asset over time if one of
the following applies:
• The customer has a right to the benefits provided
by the contract as the provider of the good or
service fulfills the contract;
• The entity providing the good or service modifies
an asset (work-in-progress) that the customer
controls; or
• The providing entity does not have an alternate
use for the asset being created or transferred, and
it has a right to payment for the asset.
The first over time recognition criterion will frequently
apply in service contracts where the customer benefits
from the service as it is performed. For example,
a company performing a facility cleaning service
would recognize revenue over time as it performs
the cleaning. The cleaning service qualifies for over
time recognition because the benefits of cleaning are
received by the customer in the form of cleaned areas
as the entity performs it. The customer’s receipt of
benefit is further illustrated by considering that if the
service provider ceases cleaning part way through
the service, the portion of the facility that was already
cleaned would not need to be cleaned by someone
else.
The second criterion for over time revenue recognition
will be commonly applied in the construction industry.
For example, a contractor enters into a contract with
its customer to build a warehouse. The warehouse
will be constructed on land already owned by the
customer. As the contractor erects the warehouse, it is
modifying the land that is controlled by the customer.
Therefore, the contractor recognizes revenue over
time.
The third criterion for over time revenue recognition
will be commonly applied in the service industry
when the customer does not receive a benefit as the
performance occurs, but the performance cannot be
redirected to another use. Similarly, this criterion may
apply when performing specialized manufacturing
where the product being manufactured cannot be
repurposed or redirected. In either instance, it will
be critical under this criterion to understand the
contractual rights of the entity providing the good or
service because revenue would only be eligible for
recognition if the entity is entitled to payment for the
work it performed at the time revenue is recognized.
For example, a manufacturer of servos enters into a
contract with a defense contractor to build a unique
part used in the manufacturing of a tank. Under the
contract, the manufacturer is prohibited from reselling
or repurposing the servos, however, it is entitled to
payment for the portion of work performed. In the
event of cancellation by the customer, the contractual
terms entitle the manufacturer to payment for work-
in-process as well as finished but not yet delivered
servos. As a result, the manufacturer meets both
criteria and recognizes revenue as the production of
servos occurs.
Methods of Recognizing Revenue Over Time
When entities satisfy performance obligations over
time, they must recognize revenue in a way that
reflects the transfer of control to the customer. This
requires entities to measure their progress toward
satisfying the performance obligation. There are two
methods for measuring progress, the output method
and the input method.
The output method recognizes revenue by directly
measuring the value of the good or service that has

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been transferred to the customer in proportion to the
total value of the good or service to be transferred
to the customer. Common output based measures
include:
• Amount (units) produced
• Amount (units) delivered
• Milestones reached
• Survey of performance completed
• Appraisal of performance completed, and
• Time elapsed
When using an output measure, it is important
to consider whether the measure selected would
inaccurately exclude goods or services that have not
been transferred to the control of the customer.
For example, assume an entity provides services
related to the management of employee health
insurance and care. The entity is engaged through
a fixed price contract with a customer to provide on-
site screening to evaluate risk factors of employees at
the customer’s many locations. The entity considers
electing two output methods: the delivery of the
report of overall employee health for each location to
the customer or the number of employees for which
screening has been completed. In evaluating these
two options, the entity considers that under the first
method, the report may not be prepared until several
weeks after screening has been conducted, and
the customer receives benefits as each employee’s
screening is completed. If the output method based
on the generation of the report were used, the entity
would not recognize revenue related to screenings
conducted before a period end that did not have the
final report issued until after period end. Therefore,
the entity concludes that measurement on an output
measure based on the issuance of a report would
not be appropriate and determines that the only
reasonable output based measure is the one based
on the number of employees screened.
An entity should select either an output or input method
for recognizing revenue over time by considering the
nature of the good or service that is transferred to
the customer. When choosing the most appropriate
method, consider what would most faithfully depict the
value transferred to the customer.
In some instances, it is necessary to adjust input
methods because they may include costs or other units
of measure that are not representative of the value
transferred to the customer. Two types of adjustments
to cost-based input methods are given in Topic 606:
• Costs incurred do not contribute to satisfying a
performance obligation. Examples include waste
materials, labor hours incurred on rework and
other similar inefficient usage of resources, and
• Costs incurred that are not proportionate to the
progress made in satisfying the performance
obligation. For example, materials purchased and
delivered to be used in constructing an asset for a
customer that have not yet been used (also known
as uninstalled materials).
For the latter category of adjustments, revenue may
be recognized up to the amount of the cost incurred if
the uninstalled material identified at contract inception
meets the following conditions:
• Uninstalled material is not a distinct good,
• The entity expects the customer to obtain control
of the good significantly prior to receiving the
services related to the good,
• Cost of the uninstalled material is significant to the
total costs related to the performance obligation,
and
• The entity acting as a principal obtains the good
but is not significantly involved in its design or
manufacturing.
The overall objective when adjusting the input measure
is to best depict the entity’s progress in satisfying the
performance obligation.

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An entity may also consider input methods to
measure revenue recognized over time. Input
measures focus on the effort expended by the entity
in fulfilling a performance obligation to a customer. In
many situations, input methods will be easier to use
because the value of the effort put into creating the
good or service transferred to the customer is more
readily available than the value of the output that was
transferred to the customer. When input measures are
used, consideration should be given to the risk that
the input measure selected would measure inputs that
do not relate to the transfer of a good or service to a
customer. It may be necessary for an entity to exclude
certain inputs from the measurement. Common forms
of input measures include:
• Labor hours
• Machine hours
• Costs incurred (cost-to-cost), and
• Time elapsed
Continuing the example above, the entity also
considers input methods to measure its performance
related to its on-site screening service with a
customer. It identifies labor hours incurred to perform
the on-site screenings as a potential input method. In
considering labor hours incurred, the entity identifies
that the screening process includes using supplies
such as disposable test kits with a significant cost-
per-use. It concludes that measuring based simply on
labor hours would not accurately reflect the value of
the service performed because of the additional costs
that are incurred for each screening. Therefore, the
entity concludes that labor hours alone would not be
an appropriate measure, rather it could use total costs
computed based on the cost of labor hours and the
cost of the supplies used for each screening.
Having identified two different potential measures, an
output measure based on the number of employees
screened and an input measure based on total
costs, the entity now considers its ability to generate
information about the number of employees screened
and the total number of employees expected to be
screened under the contract and also the total costs
incurred for services performed compared to the
total amount of costs expected to be incurred. After
evaluating these, it determines that it will be able
to more accurately generate information about the
number of employees screened and the total number
of employees expected to be screened to measure
progress consistently over time and concludes that
the output measure is most appropriate.
The guidance for over time recognition of revenue
also includes a practical expedient that if the entity
has a right to consideration equal to the value to the
customer of the entity’s performance to date, the
entity may recognize revenue at the amount it has the
right to invoice. One situation this practical expedient
may be used is a service provider that bills a fixed
hourly rate.
The overall objective when selecting a method to
recognize over time revenue is to best measure the
progress in satisfying a performance obligation. In
accomplishing this objective, the guidance does
not create a preference between output or input
methods. However, whichever method is selected
should be used for similar arrangements under similar
circumstances.
Performance Obligations Measured at a Point
in Time
Entities recognize revenue at a point in time when
their performance obligation does not meet the
criteria to be measured over time and control of
the asset has been transferred to the customer. To
determine at which point in time to recognize revenue,
entities must consider factors that indicate control of
a good or service has transferred. Topic 606 provides
five indicators—right to payment, legal title, physical
possession, liability for risks and rewards and
acceptance of the asset—that might indicate control
has been transferred, but other indicators may apply.

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No single indicator is considered determinative that
a transfer of control has occurred; rather the intent is
that consideration is given to all relevant indicators in
concluding the control has transferred to the customer.
In addition, the indicators might be given different
weightings depending on the qualitative analysis of
the arrangement. Due to this, each indicator must be
considered carefully in deciding whether transfer of
control has occurred:
• A contractual right to payment may indicate that the
customer has received control and has now agreed
to pay for the good or service. In some instances,
however, the contractual right to payment may
occur prior to satisfying a performance obligation,
such as when prepayment is required under the
contract before performance occurs.
• The transfer of legal title often indicates that
control of the good or service has also transferred;
however, in some instances the seller may retain
title as a form of security interest even though
control has transferred to the customer.
• Physical possession of an asset may indicate that
the possessor has control, but exceptions may
exist for a variety of reasons, including bill-and-
hold arrangements, repurchase agreements and
consignment sales arrangements.
• Transferring the risk and reward associated with
a good or service often indicates that control has
also transferred. When analyzing risk and reward,
it is important to exclude risks associated with
separate performance obligations.
• Whether a customer has accepted the good or
service is often a powerful indicator that control of
the good or service has transferred. Particularly in
situations where the customer is entitled to trial or
evaluation of a good or service, the control cannot
have transferred until either acceptance occurs or
the trial period lapses.
Special Considerations: Bill-and-Hold, Con-
signment Sales, and Repurchase Agreements
Three special types of transactions that are discussed
in Topic 606 are bill-and-hold, consignment sales and
repurchase agreements. These types of transactions
have unique characteristics that affect when control
has transferred and thus when an entity is able to
recognize revenue.
Bill-and-Hold
Topic 606 provides guidance on bill-and-hold
transactions that is different than the existing guidance
issued by the staff of the Securities and Exchange
Commission (SEC). Under the new guidance, an
arrangement where control of a product has been
transferred to the customer but is still in physical
possession of the entity, may be accounted for as a
bill-and-hold arrangement if it meets four criteria:
• The reason for the transaction to be structured
as a bill-and-hold must be substantive, such as a
customer request,
• The product must be identified separately for the
customer,
In revenue recognition guidance under Topic 605, the
recognition of revenue at a point in-time occurred when
risk and reward of ownership was transferred to the
customer. The new guidance in Topic 606 emphasizes
the transfer of control. The concept of control under
Topic 606 includes multiple indicators including risk
and reward. As a result, evaluations of when control
has transferred might result in the same conclusion as
when risk and reward transferred under prior guidance.
The transfer of control occurs when the customer
obtains the ability to direct the use of, and obtain
substantially all of the remaining benefits goods or
services of the performance obligation.

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• The product must be ready for physical transfer to
the customer, and
• The entity cannot have the ability to use the
product or direct it to another customer.
Consignment Sales
Consignment sales occur when a customer has
obtained physical possession of a good but control
has not been transferred. Consignment sales most
often occur when a middleman, such as a dealer
exists between the selling entity and the end user of
a product. Various indicators should be considered
to conclude whether revenue recognition should
be deferred due to a sale being on consignment,
including the following:
• The evaluation of the indicators that control has
been transferred show that control will not be
transferred until a future event occurs. Future
events that may cause a sale to be conditional
include sale to a dealers customer or a specified
amount of time lapsing.
• The selling entity can redirect the product sold
to a party other than the dealer, such as another
dealer or a customer.
• The selling entity is not entitled to full payment for
the product. For example, the dealer might pay a
deposit for the product with the remaining payment
only due upon the dealer’s sale to its customer.
Repurchase Agreements
In some scenarios, contracts may include provisions
that allow the entity performing the service to
repurchase the asset or a substantially similar asset,
from the customer. The agreement likely falls into
one of three categories: a forward, or an obligation
to repurchase the asset; a call option, the right
to purchase an asset; or a put option, an entity’s
obligation to repurchase the asset from the customer
upon request.
When forward and call options exist, control has not
been transferred, as the entity providing the asset or
service still has a say in how it is used. It also has
a say in how to obtain the benefits of the asset. In
these cases, entities should account for the options
in one of two ways: as a lease or as a financing
arrangement. Entities account for the options as a
lease if they consider the time value of money—that
is, they repurchase the item for less than the original
selling price and if the option is not part of a sale-
leaseback transaction. Alternatively, entities account
for the option as a financing arrangement if they pay
an amount equal to or greater than the original selling
price for the asset or it is part of a sale-leaseback
transaction.
For put options, an entity considers at contract
inception whether the customer has a significant
economic incentive to put the asset to the entity.
Factors to consider include the length of time that the
repurchase price exists and whether the repurchase
price is expected to be greater than the market value
of the asset at the time the repurchase price can be
exercised.
The amount of the repurchase price and the nature
of the transaction determine how to account for the
transaction. If considering the time value of money,
that is, the repurchase price is less than the original
selling price of the asset, the transaction is part of a
sale-leaseback, and a significant economic incentive
exists for the customer to exercise the put option. The
transaction would then be accounted for as a financing
arrangement. If the same transaction is not part of a
sale-leaseback transaction, it would be accounted for
as a lease. On the other hand, if a significant economic
incentive for the customer to exercise the put option
does not exist, the transaction would be accounted for
as a sale with a right of return.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
►Up Next
Recognizing revenue for the license of intellectual property has special considerations within the
new guidance. In our next revenue recognition serial, we will explore how licensing is evaluated
under the revenue recognition guidance in more detail.
Alternatively, the repurchase price might be greater
than the original selling price. If that is the case and the
repurchase price is also expected to be greater than
the value of the asset at the time of repurchase, the
transaction would be a financing arrangement. Lastly,
if the repurchase price is greater than the original
selling price but less than the expected value of the
asset at the time of repurchase, then the transaction
would be accounted for as a sale with a right of return.
For More Information
If you have any specific questions, comments or
concerns, please share them with James Comito,
Mark Winiarski or Brad Hale of MHM’s Professional
Standards Group or your MHM service professional.
You can reach James at jcomito@cbiz.com or
858.795.2029, Mark at mwiniarski@cbiz.com or
816.945.5614, and Brad at bhale@cbiz.com or
727.572.1400.