2. REVENUE RECOGNITION BASICS BY RAHUL BHATI 2
5 Step Approach (I STAR)
I
• Identify Contract Terms
S
• Separate Performance Obligation
T
• Transaction Price
A
• Allocate Transaction Price to Performance obligation
R
• Recognize Revenue on satisfying each performance
obligation
3. REVENUE RECOGNITION BASICS BY RAHUL BHATI 3
Point of Time vs Over The Period
Point of Time
Revenue recognized on satisfying
performance obligation by delivery of goods
or Services
Examples: Delivery of Goods or Service
Over the Period
Revenue recognition spread over time as the
performance obligations satisfied.
Examples: Long Term Contracts, Partial
Delivery of goods or services, Subscriptions.
4. REVENUE RECOGNITION BASICS BY RAHUL BHATI 4
Principal vs Agent
Principal Agent
Definition The entity that controls the
good or services before delivery
to customer.
The entity arranges for other
party to provide goods or
services to customer.
Revenue Recognized Gross Amount as Sales Net Amount as Sales
Important Indicators:
- Primary Responsibility a r
- Inventory Risk a r
- Price Determination a r
- Control a r
5. REVENUE RECOGNITION BASICS BY RAHUL BHATI 5
Long-Term Construction Contract
(> 12 Months)
Percentage of Completion Completed Contract
Revenue Recognized Pro-rata Revenue & Expense
recognized based on % of work
completed.
Revenue Recognized on
completion of Contract.
Allowed under US GAAP Yes Yes, If POC cannot be applied
Allowed under IRS Yes Yes
Method to compute %
completion:
- Input Method Proportion of Cost incurred to
Estimated Total Project cost
r
- Output Method Based on milestone or quantity r