Revenue recognitionAcademic Resource CenterRevenue.docx

Revenue recognition
Academic Resource Center
Revenue recognition Page 2
General
► This new guidance will supersede almost all existing revenue
guidance under US
GAAP (including industry guides) and IFRS.
► The AICPA has formed various industry task forces to help
develop non-authoritative
guidance.
► The FASB and IASB announced the formation of a joint
transition resource group
(TRG) that will be responsible for informing the Boards about
interpretive issues that
arise as companies implement the revenue standards. The TRG
will not issue
guidance.
The FASB and IASB issued new guidance on accounting for
revenue
recognition, Revenue Recognition – Revenue from Contracts
with
Customers.

► FASB – ASC 606 (ASU 2014-09)
► IASB – IFRS 15
May 2014
General
► ASC 606 applies to both public and non-public entities. For
non-public entities, there is
some specific relief related to disclosures, transition and the
effective date.
► At the December 5, 2016 AICPA National Conference on
Current SEC and PCAOB
Developments, Sylvia E. Alicea, a professional accounting
fellow of the office of the chief
accountant (OCA) made the following comments:
“SAB Topic 13 will continue to apply to registrants prior to
their adoption of the new
revenue standard so it will continue to be relevant until all
registrants have completed their
transition. New guidance will be provided, as needed. However,
when OCA evaluates
implementation-related consultations under U.S. GAAP, our
starting point is the new
revenue standard (and any subsequent amendments) as issued by
the FASB. Therefore, I
believe registrants should also apply that model (as opposed to
SAB Topic 13) when

evaluating their revenue arrangements for adoption of Topic
606.”
► IFRS 15 does not specifically apply to non-public entities.
These non-public entities may
apply IFRS for Small and Medium-Sized Entities.
Effective date and adoption methods
US GAAP
► For US public entities, certain not-for-profit entities and
certain employee benefit plans, the guidance is effective
for annual periods beginning after December 15, 2017.
Early adoption is permitted for annual periods beginning
after December 15, 2016.
► All other US entities are required to apply the standard to
annual periods beginning after December 15, 2018 but
can also early adopt beginning after December 15, 2016.
IFRS
► The guidance is effective for annual
periods beginning on or after
January 1, 2018.
► Early adoption is permitted. Early
adoption was permitted when IFRS
15 was originally issued.

The adoption methods available for both US GAAP and IFRS
include the full retrospective approach
and the modified retrospective approach. These are further
explained on the following slide.
Key considerations Full retrospective Modified retrospective
Apply to which periods
presented?
All periods presented Only the current period
Apply to which contracts? All contracts that would have existed
during all periods presented if the
new standard had been applied from
contract inception*
Any contracts existing as of the effective date (as
if the new standard had been applied since
inception of the contract), as well as any new
contracts from that date forward**
Recognition of the impact
of adoption in the
financial statements?
Apply ASC 250, cumulative effect of
changes to prior periods reflected in

opening balance of retained earnings
Cumulative effect of changes is reflected in
opening balance of retained earnings for the most
current period presented
Adoption disclosure
requirements?
Apply ASC 250, including disclosure
of the reason for the change and the
method of applying the change
Disclose all financial statement line items in year
of adoption as if prepared under current guidance
(effectively requires two sets of accounting
records in year of adoption)
* In April 2016, the IASB approved an amendment that allows
entities that use the full retrospective option to only apply IFRS
15 to contracts that are not completed as of the
beginning of the earlies period presented. The IASB also
provided a practical expedient under both approaches. This
allows an entity to determine the aggregate effect of all of
the contract modifications that occurred between contract
inception and the earliest date presented.
** In May 2016, the FASB issued an amendment that allows
entities the option of applying the modified retrospective
approach to all contracts, not just those that are not
complete. Entities that elect this option would apply the full
retrospective approach to all contracts, but would present the
effects in the year of adoption without recasting prior
years. The FASB also provided a practical expedient under both
approaches. This allows an entity to determine the transaction
price for all unsatisfied and satisfied performance
obligations at the beginning of the earliest period presented

instead of evaluating the effects of contract modifications from
contract inception through the beginning of the earliest
period presented.
Objective
The objective of the guidance “is to establish principles
that an entity shall apply to report useful information to
users of financial statements about the nature, amount,
timing, and uncertainty of revenue and cash flows arising
from a contract with a customer.” (ASC 606-10-10-1)
Scope
A customer is
“a party that has contracted
with an entity to obtain goods
or services that are an output

of the entity’s ordinary
activities.”
The guidance applies to most
contracts with customers with only
a few exceptions. For example, all
contracts within the scope of
Topic 944, such as insurance
contracts and leases, are excluded.
It does not apply to other
transactions or activities.
Overview
Overview
In order to determine when to recognize revenue, the entity
applies steps:
Step 1: Identify the contract(s) with the customer
Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance
obligations
Step 5: Recognize revenue when (or as) each performance
obligation is satisfied
Identify the contract(s) with the customer
A contract is defined as “… an agreement between two
or more parties that creates enforceable rights and
obligations.” (ASC 606-10-25-2)
Both written and oral agreements are considered
contracts. Contracts can also be implied based on the
seller’s normal business practices.
Step 1:
► The following criteria must all be met for a contract to be
identified
under ASC 606:
► The contract must be approved by all parties to the contract.

► Each party’s rights regarding the goods and services to be
transferred
must be identifiable.
► The payment terms must be identifiable.
► The contract must have commercial substance.
► It must be probable that a vendor will collect the
consideration to which it
is entitled in exchange for the goods or services expected to be
delivered.
(Note that under US GAAP, probable is defined as likely to
occur and under IFRS it is
defined as more likely than not. Thus, the collectability
threshold is slightly higher under
US GAAP and could result in some differences as to what is
considered a contract.)
Identify the contract(s) with the customerStep 1:
► When the criteria for a contract are not met, any
consideration received from
a customer should be accounted for as a liability until one of the
following
occurs, after which revenue can be recognized:
► All goods or services have been provided to the customer,
are
substantially paid for by the customer and are nonrefundable.

► Nonrefundable consideration would be recognized as revenue
when an
entity has transferred control of goods or services and has
stopped
transferring additional goods or services and has no obligation
to make
additional transfers.
► The contract has ended and consideration received is not
refundable.
► The criteria to be considered a contract have been
subsequently met.
► Contracts can be combined if:
► Under the guidance in ASC 60 6-10-25-9a, they are
negotiated “as a
package with a single commercial objective.”
► The amount of consideration in one contract depends on the
price or
performance in the other contract.
► The goods or services identified in the contracts are a single
performance obligation.

► Contract modifications:
► A contract modification should be accounted for as a
separate contract if additional
distinct goods or services are promised and the price increases
by the standalone selling
price of these additional goods or services.
► If a contract modification does not meet the criteria to be
accounted for as a separate
contract, then the remaining goods or services to be transferred
should be accounted for
in one of the following manners:
► If the remaining goods or services to be transferred are
distinct from those previously
delivered, then the contract modification should be handled as a
termination of an
existing contract and the origination of a new contract.
► If the remaining goods or services are not distinct, then the
contract modification
should be accounted for as part of the existing contract.
► If the remaining goods or services are combination of both of
the above, then the
accounting for the contract modification should be consistent
with that guidance.

A performance obligation is defined as a contractual
promise with a customer to transfer a service or good to
the customer.
► Each separate performance obligation must be identified by
the
entity by evaluating the goods or services promised in the
contract and determining which of these (or which bundles of
goods and services) is distinct.
► If goods or services are not distinct, then they should be
bundled together and considered as one performance
obligation.
Identify the separate performance obligationsStep 2:
► A good or service is considered distinct if it meets the
following
criteria per ASC 606-10-25-19:
► The customer can benefit from the good or service either on
a stand-alone

basis or along with another resource that is readily available to
the customer
(capable of being distinct).
► The entity’s promise to transfer the good or service is
separately identifiable
from other promises in the contract (distinct within the context
of the
contract).
► Factors that indicate goods/services are not distinct include
the
following:
► The goods or services are highly interrelated and the entity
must provide a
significant service to integrate the goods or services into the
combined
item(s) for the customer
► The goods or services are significantly modified or
customized in order to
fulfill the contract.

Determination of separate performance obligations
Example 1
An entity licenses customer relationship
management software to a customer. In addition,
the entity promises to provide consulting services
to significantly customize the software to the
customer’s information technology environment
for total consideration of $600,000.
► Are the software and consulting services one
performance obligation or two?
See guidance in ASC 606-10-25-19.
The entity is providing a significant service of integrating the
goods and
services (the license and the consulting services) into the
combined item for
which the customer has contracted. The software is significantly
customized by
the entity in accordance with the specifications negotiated with
the customer.
Thus, the goods and services are not distinct as the criterion
that the customer
can benefit from the customer management software on a stand-

alone basis
has not been met. Therefore, the entity would account for the
license and
consulting services together as one performance obligation.
Example 1 solution
The transaction price is the amount that the entity expects
to be entitled to as a result of transferring goods or
services to the customer.
In determining the transaction price, there are several
things to consider, including:
► Variable consideration
► The time value of money
► Noncash considerations
► Considerations payable to a customer
Determine the transaction priceStep 3:
► Contract consideration could be variable due to the existence
of
discounts, incentives, refunds, rebates, contingencies, price
concessions, etc.

► If the consideration specified in the contract is variable and
it is
probable that a significant revenue reversal will not occur,
then the entity should include an estimate of the variable
consideration to which the entity will be entitled in order to
determine the transaction price.
Determine the transaction price – variable
consideration
Step 3:
► The entity may use one of two estimation methods as
described
below based on the guidance in ASC 606-10-32-8. The chosen
method should be applied consistently throughout the contract.
► The expected value method: the estimate is measured as “the
sum of the
probability-weighted amounts in a range of possible
consideration
amounts.” This method may be most appropriate when there are
a large
number of similar contracts.
► The most likely amount method: the estimate is measured as
“the single
most likely amount in a range of possible consideration
amounts.” This

method may be most appropriate when there are only two
possible
outcomes (e.g., either a bonus is received or not received)
Determine the transaction price – variable
consideration
Step 3:
Variable consideration
Example 2
Catherine’s Costumes sells 1,000 Halloween
costumes to a wholesaler for total
consideration of $20 per costume. The
contract provides the customer with the right to
return all unsold costumes after Halloween.
Due to its extensive experience in this industry,
Catherine’s Costumes can reliably provide the
following range of probability of returns based
on this sales volume.
► What is the estimated
transaction price for the
contract if Catherine’s
Costumes uses the
expected value method?
► The most likely amount
method?

Costumes returned Probability
50 40%
75 45%
100 15%
Expected value method: the estimated contract price is
measured using the
sum of the probability-weighted amounts in the range of
possible consideration
amounts. Therefore, the calculation is as follows:
Estimated contract price= (950 x 40% x $20) + (925 x 45% x
$20) + (900 x 15% x $20)
= $7,600 + $8,325 + $2,700
= $18,625
Most likely amount method: based on the highest probability of
45% for 75
costumes being returned, this would be considered the most
likely amount.
Therefore, Catherine’s Costumes will calculate using 925
costumes multiplied
by $20 per costume for a total estimated contract price of
$18,500.

Example 2 solution
► If the time between (1) when the entity provides the goods or
services and (2)
the customer makes the payment for these goods or services is
more than one
year, the entity may need to adjust the amount of the
consideration to reflect
the time value of money. When adjusting for a financing
component, the
discount rate should be based on the credit characteristics of the
party
receiving the financing at the inception of the contract.
► Per ASC 660-10-32-16, if the contract has a financing
component that is
significant to the contract, then the entity should only recognize
revenue at an
amount that reflects what the cash selling price would be at the
point that the
goods or services were transferred. The impact on net income
of this
financing component should be presented separately on the
statement of
comprehensive income as interest income or expense.
Determine the transaction price – the time
value of money
Step 3:

The following factors should be considered by the entity when
determining whether the financing component is significant:
► The expected length of time between payment and transfer of
the goods or
services
► Whether the amount of consideration would differ
substantially if the customer
paid cash promptly in accordance with typical credit terms in
the industry
► The differences between the interest rate in the contract and
the prevailing
interest rates in the market
Determine the transaction price – the time
value of money
Step 3:
The time value of money
Example 3

► Madison Wholesalers (MW) enters into a
contract with a customer to sell a product for
$200,000. The product will be delivered in two
years, but the customer pays for it today. MW is
effectively the party receiving the financing.
Based on MW’s credit characteristics, its
interest rate is 5% annually.
► Would you assess that the financing component
of the contract is significant? Explain.
► What are the journal entries that Madison
Wholesalers will record over the two-year
period?
Is the financing component significant to the contract?
In evaluating whether the financing component is significant,
one could argue
that a two-year period of time between the payment and the
transfer of the
goods is significant. One could also argue that the amount of
consideration
would differ significantly based on Madison Wholesaler’s
interest rate of 5%.
Therefore, given the significance of the financing component,
this should be
recognized in the revenue amount.

Example 3 solution
What are the journal entries that Madison Wholesalers will
record over the two-year
period?
At the date that Madison Wholesalers receives the cash,
Madison Wholesalers should make the following
entry:
Cash $200,000
Deferred revenue $200,000
During the two-year period, Madison Wholesalers will
recognize interest expense of $20,500 (200,000 x
(1.052-1)).
Interest expense $20,500
When the product is transferred in two years, Madison
Wholesalers will recognize revenue based on the
balance of the deferred revenue account.
Revenue $220,500
Example 3 solution (continued)

► Per ASC 660-10-32-21, if the consideration that the entity
receives is noncash,
the transaction price is measured as the fair value of the
noncash
consideration at the contract’s inception.
► Per ASC 660-10-32-22, if the fair value of the noncash
consideration cannot
be reliably measured, then the transaction price is measured as
the
standalone selling price of the goods or services promised to the
customer in
the contract.
Determine the transaction price – noncash
consideration
Step 3:
Noncash consideration
Example 4
ABC Computing provides computer installation

services to a customer. The standalone value
of these services is $4,300. In exchange, the
customer gave ABC Computing several used
computers. These used computers have a fair
value of $4,500.
► What is the journal entry that ABC Computing will make to
record the sale?
► What would the journal entry be if the fair value of the used
computers was not
available?
See guidance in ASC 606-10-32-21 and 22.
What is the journal entry that ABC Computing will make to
record the sale?
ABC Computing will record the transaction price as the fair
value of the noncash consideration
received.
Computer inventory $4,500
Service revenue $4,500
What would the journal entry be if the fair value of the used
computers was not
available?

If the fair value of the computers is not available, ABC
Computing will record the transaction at
the standalone selling price of the services.
Example 4 solution
► If an entity expects to pay a customer an amount in the form
of cash, “… credit
or other items (for example, a coupon or voucher) that can be
applied against
amounts owed to the entity …,” this is referred to as a
consideration payable.
► Consideration payable to a customer should be treated as a
reduction of the
transaction price unless the payment is in exchange for a
distinct service or
good.
Determine the transaction price –
consideration payable (ASC 606-10-32-25)
Step 3:

Consideration payable
Example 5
MMR Wholesalers sells 500 machine-embroidered
tote bags to a customer for $25 per bag in the first
quarter of the year. MMR Wholesalers has a
contract with the customer that if they purchase more
than 3,000 tote bags during the year, they will receive
a retroactive, $5-per-bag discount. In the first
quarter, MMR Wholesalers does not anticipate that
the customer will earn the volume discount.
However, during the second quarter, the customer
purchases 3,000 bags
► What is the amount of revenue that MMR
Wholesalers will record in the first quarter? The
second quarter?
What is the amount of revenue that MMR Wholesalers will
record in the first quarter?
MMR Wholesalers records the transaction price of $25 per bag
in the first quarter because it

does not anticipate that the customer will earn the discount.
Consequently, MMR Wholesalers
will record total revenue of $12,500 in the first quarter (500
bags x $25 per bag).
record in the second quarter?
As the customer has earned the volume discount, MMR
Wholesalers will report revenue of
$57,500. This amount is calculated as follows:
Example 5 solution
Amount Calculation
$60,000 3,000 bags sold in second quarter x $20 ($25 per bag
less $5-per-bag volume discount)
(2,500) 500 bags sold in first quarter x $5-per-bag volume
discount
$57,500 Revenue to recognize
► If the contract has multiple performance obligations, then the
transaction
price should be allocated across the performance obligations.
► The entity first determines the standalone selling price of
each good or
service underlying each performance obligation at the inception

of the
contract.
► Per ASC 606-10-32-31, the standalone selling price is the
amount that
the seller would charge if it were to sell the good or service
separately.
► The best way to determine the standalone selling price is to
use the
price the seller would actually charge when it sells the same
good or
service to similar customers under similar circumstance.
Allocate the transaction price to the separate
performance obligations in the contract
Step 4:
Allocation of the transaction price
Example 6
LEDD Company enters into a contract with a
customer to sell three products for a total transaction
price of $50,000. Each product is appropriately
classified as a separate performance obligation.
LEDD Company typically sells these three products
on a standalone basis for the following prices:
► How should LEDD Company allocate the transaction price to

the three
products?
Product Standalone selling price
A $10,000
B 22,000
C 20,000
Total $52,000
LEDD Company should allocate the $50,000 transaction price
based on the products’ relative,
standalone selling prices as follows:
Example 6 solution
Product Standalone selling price Percentage Allocated
transaction price
A $10,000 19.2% $ 9,600
B 22,000 42.3% 21,150
C 20,000 38.5% 19,250
Total $52,000 100.0% $50,000

► Per ASC 606-10-32-34, if the seller cannot directly observe a
standalone
selling price, the seller must estimate a standalone selling price.
(Note:
vendor-specific objective evidence is not required.)
► The following methods are suitable:
► Adjusted market assessment approach: the entity estimates
the price that customers in the
market in which it sells the goods or services would be willing
to pay. This approach might
include referring to prices charged by competitors.
► Expected cost plus a margin approach: the entity forecasts
the costs associated with
providing the good or service and adds an appropriate margin.
► Residual approach: the entity estimates the standalone selling
price by subtracting the
standalone selling prices of the goods or services that underlie
the other performance
obligations from the total transaction price. (Note: this method
can only be utilized when
the same good or service is sold to different customers and the
standalone selling price is
highly variable or when the good or service has not been
previously sold.)
Step 4:

► If the sum of the standalone selling prices is greater than the
transaction price,
then the entity typically should allocate the discount to the
separate
performance obligations on a relative, standalone-selling-price
basis. There
are exceptions to this rule under which a discount may not be
allocated to all
performance obligations if certain criteria are met. The details
of which are not
covered in this lecture material.
► If the transaction price includes an amount that is contingent
on a future event
or circumstance, it generally should be allocated to the separate
performance
obligations.
Step 4:

Estimation of standalone selling price
Example 7
Hammond Industries enters into a contract with a customer to
sell three products for a
total transaction price of $430,000. Each product is
appropriately classified as a
separate performance obligation. Hammond Industries sells
products A and B on an
individual basis. Product C is a new product that has not been
previously sold.
Hammond Industries must estimate the allocated standalone
selling prices.
Information related to these three products is provided in the
following table.
► How should Hammond Industries allocate the transaction
price to the three
products using the adjusted market assessment approach? The
cost plus
margin approach? The residual approach?
Product Standalone selling price Market competitor prices
Forecasted cost
A $100,000 $ 99,000 $ 79,000
B 250,000 255,000 200,000
C Not available 85,000 65,000
Total $439,000 $344,000

Adjusted market assessment approach: Hammond Industries
should
allocate on a relative basis as follows:
Example 7 solution
Product Market competitor prices Percentage of total Allocated
transaction price
A $ 99,000 22.55% $ 96,965
B 255,000 58.09% 249,787
C 85,000 19.36% 83,248
Total $439,000 100.00% $430,000
Expected cost plus margin approach
Given a total cost of $344,000 and a total transaction price of
$430,000, an
appropriate margin would be 25% ($430,000/$344,000). Thus,
to get the
allocated transaction price for each product, we multiply the
forecasted cost of
each product by 1.25.
:
Product Forecasted cost Allocated transaction price

A $ 79,000 $ 98,750
B 200,000 250,000
C 65,000 81,250
Total $344,000 $430,000
Residual approach
Using the residual approach, the standalone selling prices that
are available for
products A and B are reduced from the total transaction price to
arrive at the
standalone selling price for product C, which is $80,000.
Product Standalone selling price
A $430,000
B (100,000)
C (250,000)
Total $ 80,000
► The entity should recognize as revenue the amount of the

transaction price allocated to a performance obligation when it
satisfies that performance obligation by transferring a good or
service to a customer.
► Transfer occurs when the customer obtains control of the
asset.
► ASC 606-10-25-25 defines control as “the ability to direct
the use of and
obtain substantially all of the remaining benefits from the
asset.”
Recognize revenue when (or as) each
performance obligation is satisfied
Step 5:
Performance obligations may be satisfied at a point in time or
over
time.
► At a point in time: per ASC 660-10-25-30, if satisfied at a
point in
time, then revenue is recognized when control is transferred.
Some indications of change in control are as follows:
► The seller has a present right to payment.
► The customer has a legal title to the asset.
► The seller has transferred physical possession of the asset to
the customer.
► The customer has significant risks and rewards of ownership

of the asset.
► The customer has accepted the asset.
Step 5: Recognize revenue when (or as) each
Recognition at a point in time
Example 8
Kentucky Associates enters into a
contract to sell a product to a
customer. The product is shipped free
on board shipping point.
► Should Kentucky Associates
recognize revenue when the product
is shipped or received by their
customer?
Example 8 solution
See the guidance in ASC 606-10-25-30.

Kentucky Associates can recognize revenue when the product is
shipped
because the customer obtains control of the product when it is
shipped.
Although the customer doesn’t have physical possession of the
product when it is
shipped, it has legal title and the risks and rewards of
ownership.
Over time, per ASC 606-10-25-27:
► An entity “satisfies a performance obligation and recognizes
revenue over time if one of the following criteria is met”:
► The customer is receiving and consuming the benefits of the
seller’s performance
as the seller performs.
► The seller creates or enhances an asset that the customer
controls as it is created
or enhanced.
► The asset created by the seller does not have an alternative
use and the seller
has a right to payment for performance completed to date.

► If a performance obligation is satisfied over time, then
revenue should be recognized in
accordance with the progress toward completion of the
performance obligation, if the entity
can reasonably measure its progress toward completing the
obligation. In measuring
progress, either input or output methods may be used. The
method an entity chooses should
best depict the entity’s transfer of control of promised goods or
services. Additionally, this
method should be used for all similar performance obligations
and in similar circumstances.
► Input method: per ASC 606-10-55-20, revenue is recognized
based on the seller’s efforts or inputs
toward completion of the performance obligation.
► Output method: per ASC 606-10-55-17, revenue is
recognized based on the value (to the
customer) of the goods or services that have been transferred.
► If an entity cannot reasonably measure its progress toward
completion of its performance
obligation and it expects to recoup its cost, the entity can
recognize revenue to the extent of
incurred costs.

Recognition over a period of time
Example 9
The Paving Job Giant Company (PJG) has extensive experience
in the road construction business. PJG has an excellent track
record in estimating costs of projects and is a very efficient
construction company. PJG has entered into a two-year contract
to build a 25-mile toll road for $50 million. The toll road is
adjacent
to an old gravel road. The toll road operator plans on opening
the
toll road in five-mile sections as the paving is completed. PJG
estimates this project will require $30 million of road
construction
material and 400,000 construction hours at an average cost of
$25 per hour.
At the end of year one, 10 miles of toll road have been turned
over and are in use by the toll road
operator. Some work has also been done on the next section of
the road. Road material costs of
$15 million and 200,000 construction hours have been incurred.
► What revenue should PJG record for this performance
obligation at the end of year one using
the input method? The output method?

Example 9 solution
Input method:
ASC 606-10-55-20 indicates revenue using the input method
should be based on the seller’s
efforts to satisfy its performance obligation. PJG has incurred
50% of the road material costs
($15 million/$30 million) and 50% of the construction hours
(200,000 hours/400,000 hours).
Therefore, $25 million should be recognized as revenue at the
end of year one, calculated as
50% of the $50 million.
Output method:
ASC 606-10-55-17 indicates revenue using the output method
should be based on the value of
the goods transferred to the customer. PJG has completed 10
miles of road and turned them over
to the toll road operator. The remaining 15 miles are not
currently available to the toll road
operator. Therefore, $20 million should be recognized as
revenue at the end of year one,
calculated as 40% (10 miles/25 miles) of the $50 million.
Incremental costs of obtaining a contract
The incremental costs of obtaining a contract, such as a sales
commission, should be recorded as an asset, if the entity

expects to recover those costs. As a practical expedient, these
incremental costs can be expensed if the amortization period
would be one year or less. Generally, costs that would have
been incurred whether or not the contract was obtained should
be expensed when incurred.
Costs of fulfilling a contract
An entity should record an asset for the cost to fulfill a contract
only if all the following criteria are met:
► The costs relate directly to a contract or an anticipated
contract.
► The costs relate to resources the entity will used to satisfy
performance
obligations in the future.
► The costs are expected to be recovered.
► The key principle is to help users of financial statements
understand the
amount, timing and uncertainty of revenue and cash flows
arising from
contracts with customers.

► There are three broad disclosure requirements that will
present both qualitative
and quantitative information about:
► Contracts with customers
► Significant judgments and changes in judgments made in
applying the guidance to those
contracts.
► Assets recognized from costs to obtain or fulfill a contract.
► There are more disclosure requirements for public companies
than for
nonpublic companies.
► There is some divergence between US GAAP and IFRS as it
relates to interim
disclosure requirements.
Disclosures
Overview: revenue recognition steps per ASC 606
Identify the
contract(s) with a
customer
A contract is an agreement
between two or more parties that
creates enforceable rights and
obligations.
Contract criteria:
► The contract must be approved by all
parties to the contract and they must be

committed to perform their obligations.
► Each party’s rights regarding the goods
and services to be transferred must be
identifiable.
► The payment terms must be identifiable.
► The contract must have commercial
substance.
► It must be probable that a vendor will
collect the consideration to which it is
entitled in exchange for the goods or
services expected to be delivered.
Identify the
separate
performance
obligations
A performance obligation is
defined as a contractual
promise with a customer to
transfer a service or good to
the customer.
Good or service is distinct if both
criteria are met:
► The customer can benefit from the
good or service either on a stand-
alone basis or along with resources
that are readily available to the
customer (capable of being
distinct).
► The entity’s promise to transfer the

good or service is separately
identifiable from other promises in
the contract (distinct within the
context of the contract).
Determine the
transaction price
The transaction price is the
amount that the entity expects
to be entitled to as a result of
transferring goods or services
to the customer.
Several considerations:
► Variable consideration: contract
consideration could be variable due to
the existence of discounts, incentives,
refunds, rebates, contingencies, price
concessions, etc.
► Time value of money: may need to
adjust the amount of consideration for
the time value of money if the time
between (1) when the entity provides
the goods or services and (2) the
customer makes the payment for these
goods or services is more than one
year.
► Noncash consideration
► Consideration payable: if an entity
expects to pay a customer an amount
in the form of cash, credit or other that
can be applied to amounts owed to the
entity.

Allocate the
transaction price
to the separate
performance
obligations
► If the contract has multiple
performance obligations,
then the transaction price
should be allocated across
the performance obligations
► Allocate based on
standalone selling price
► If the standalone selling
price is not available,
estimate the standalone
selling price.
1 2 3 4
Recognize revenue
when (or as) the entity
satisfies a performance
obligation
Transfer occurs when the customer
obtains control of the asset.
At a point in time:
► Seller has a present right to payment.
► Customer has legal title to the asset.
► Seller has transferred physical possession
of the asset to the customer.

► Customer has significant risks and
rewards of ownership.
► Customer has accepted the asset.
Over time :
► Customer receiving/consuming benefits as
the seller performs.
► Seller creates/enhances asset that the
customer controls as it is created/
enhanced.
► Asset has no alternative use and the seller
has a right to payment for performance
completed to date.
5
Principle: an entity should recognize revenue in an amount that
reflects the consideration that the entity expects to be entitled to
in exchange for goods or services.
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Revenue recognition
*
Revenue recognition
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GeneralThis new guidance will supersede almost all existing
revenue guidance under US GAAP (including industry guides)
and IFRS. The AICPA has formed various industry task forces
to help develop non-authoritative guidance. The FASB and
IASB announced the formation of a joint transition resource
group (TRG) that will be responsible for informing the Boards
about interpretive issues that arise as companies implement the
revenue standards. The TRG will not issue guidance.
The FASB and IASB issued new guidance on accounting for
revenue recognition, Revenue Recognition – Revenue from
Contracts with Customers. FASB – ASC 606 (ASU 2014-
09)IASB – IFRS 15
May 2014

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Revenue recognition
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GeneralASC 606 applies to both public and non-public entities.
For non-public entities, there is some specific relief related to
disclosures, transition and the effective date. As of March 2016,
the SEC has not yet announced whether it will rescind its
requirements for revenue recognition contained in Staff
Accounting Bulletin No. 104.IFRS 15 does not specifically
apply to non-public entities. These non-public entities may
apply IFRS for Small and Medium-Sized Entities.
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Revenue recognition
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US GAAPFor US public entities, certain not-for-profit entities
and certain employee benefit plans, the guidance is effective for
annual periods beginning after December 15, 2017. Early
adoption is permitted for annual periods beginning after
December 15, 2016. All other US entities are required to apply
the standard to annual periods beginning after December 15,
2018 but can also early adopt beginning after December 15,

2016.
IFRSThe guidance is effective for annual periods beginning on
or after January 1, 2018. Early adoption is permitted. Early
adoption was permitted when IFRS 15 was originally issued.
The adoption methods available for both US GAAP and IFRS
include the full retrospective approach and the modified
retrospective approach. These are further explained on the
following slide.
*
Revenue recognition
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* In February 2016, the FASB approved an amendment that
allows entities the option of applying the modified retrospective
approach to all contracts, not just those that are not complete.
Entities that elect this option would apply the full retrospective
approach to all contracts, but would present the effects in the
year of adoption without recasting prior years. The FASB also
provided a practical expedient under both approaches. This
allows an entity to determine the transaction price for all
unsatisfied and satisfied performance obligations at the
beginning of the earliest period presented instead of evaluating
the effects of contract modifications from contract inception
through the beginning of the earliest period presented.Key
considerationsFull retrospective Modified retrospective Apply
to which periods presented?All periods presentedOnly the
current periodApply to which contracts?All contracts that would
have existed during all periods presented if the new standard
had been applied from contract inceptionAny contracts existing

as of the effective date (as if the new standard had been applied
since inception of the contract), as well as any new contracts
from that date forward*Recognition of the impact of adoption in
the financial statements?Apply ASC 250, cumulative effect of
changes to prior periods reflected in opening balance of retained
earningsCumulative effect of changes is reflected in opening
balance of retained earnings for the most current period
presentedAdoption disclosure requirements?Apply ASC 250,
including disclosure of the reason for the change and the
method of applying the changeDisclose all financial statement
line items in year of adoption as if prepared under current
guidance (effectively requires two sets of accounting records in
year of adoption)
*
Revenue recognition
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Objective
The objective of the guidance “is to establish principles that an

entity shall apply to report useful information to users of
financial statements about the nature, amount, timing, and
uncertainty of revenue and cash flows arising from a contract
with a customer.” (ASC 606-10-10-1)
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Scope
A customer is “a party that has contracted with an
entity to obtain goods or services that are an output of the
entity’s ordinary activities.”
The guidance applies to most contracts with customers with
only a few exceptions. (e.g. insurance contracts and leases).
It does not apply to other transactions or activities.
ASC 606-10-15-3
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Overview

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Overview
Step 1:
Step 2:
Identify the performance obligations in the contract
Step 3:
Determine the transaction price
Step 4:
Allocate the transaction price to the performance obligations
Step 5:
Recognize revenue when (or as) each performance obligation is
satisfied
*
Identify the contract(s) with a customer
A contract is an agreement between two or more parties that
creates enforceable rights and obligations.
Contract criteria:The contract must be approved by all parties to
the contract and they must be committed to perform their
obligations.Each party’s rights regarding the goods and services
to be transferred must be identifiable.The payment terms must

be identifiable.The contract must have commercial substance.It
must be probable that a vendor will collect the consideration to
which it is entitled in exchange for the goods or services
expected to be delivered.
Identify the separate performance obligations
A performance obligation is defined as a contractual promise
with a customer to transfer a service or good to the customer.
Good or service is distinct if both criteria are met:The customer
can benefit from the good or service either on a stand-alone
basis or along with resources that are readily available to the
customer (capable of being distinct).The entity’s promise to
transfer the good or service is separately identifiable from other
promises in the contract (distinct within the context of the
contract).
The transaction price is the amount that the entity expects to be
entitled to as a result of transferring goods or services to the
customer.
Several considerations:Variable consideration: contract
consideration could be variable due to the existence of
concessions, etc.Time value of money: may need to adjust the
amount of consideration for the time value of money if the time
between (1) when the entity provides the goods or services and
(2) the customer makes the payment for these goods or services
is more than one year.Noncash considerationConsideration
payable: if an entity expects to pay a customer an amount in the
form of cash, credit or other that can be applied to amounts
owed to the entity.
Allocate the transaction price to the separate performance
obligations If the contract has multiple performance obligations,
then the transaction price should be allocated across the
performance obligationsAllocate based on standalone selling
priceIf the standalone selling price is not available, estimate the
standalone selling price.
1

2
3
4
Recognize revenue when (or as) the entity satisfies a
performance obligation
Transfer occurs when the customer obtains control of the asset.
At a point in time:Seller has a present right to
payment.Customer has legal title to the asset.Seller has
transferred physical possession of the asset to the
customer.Customer has significant risks and rewards of
ownership.Customer has accepted the asset.
Over time :Customer receiving/consuming benefits as the seller
performs.Seller creates/enhances asset that the customer
controls as it is created/ enhanced.Asset has no alternative use
and the seller has a right to payment for performance completed
to date.
5
*

Revenue recognition
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A contract is defined as “… an agreement between two or more
parties that creates enforceable rights and obligations.” (ASC
606-10-25-2)
Both written and oral agreements are considered contracts.
Contracts can also be implied based on the seller’s normal
business practices.
Step 1:
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Revenue recognition
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The following criteria must all be met for a contract to be
identified under ASC 606:The contract must be approved by all
parties to the contract.Each party’s rights regarding the goods
and services to be transferred must be identifiable.The payment
terms must be identifiable.The contract must have commercial
substance.It must be probable that a vendor will collect the
consideration to which it is entitled in exchange for the goods
or services expected to be delivered. (Note that under US
GAAP, probable is defined as likely to occur and under IFRS it
is defined as more likely than not. Thus, the collectability
threshold is slightly higher under US GAAP and could result in
some differences as to what is considered a contract.)

Step 1:
*
Revenue recognition
Page *
When the criteria for a contract are not met, any consideration
received from a customer should be accounted for as a liability
until one of the following occurs, after which revenue can be
recognized:All goods or services have been provided to the
customer, are substantially paid for by the customer and are
nonrefundable. Nonrefundable consideration would be
recognized as revenue when an entity has transferred control of
goods or services and has stopped transferring additional goods
or services and has no obligation to make additional
transfers.The contract has ended and consideration received is
not refundable.The criteria to be considered a contract have
been subsequently met.
Step 1:
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Revenue recognition
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Contracts can be combined if:Under the guidance in ASC 60 6-
10-25-9a, they are negotiated “as a package with a single
commercial objective.”The amount of consideration in one

contract depends on the price or performance in the other
contract.The goods or services identified in the contracts are a
single performance obligation.
Step 1:
*
Revenue recognition
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Contract modifications:A contract modification should be
accounted for as a separate contract if additional distinct goods
or services are promised and the price increases by the
standalone selling price of these additional goods or services.
If a contract modification does not meet the criteria to be
accounted for as a separate contract, then the remaining goods
or services to be transferred should be accounted for in one of
the following manners:If the remaining goods or services to be
transferred are distinct from those previously delivered, then the
contract modification should be handled as a termination of an
existing contract and the origination of a new contract.If the
remaining goods or services are not distinct, then the contract
modification should be accounted for as part of the existing
contract.If the remaining goods or services are combination of
both of the above, then the accounting for the contract
modification should be consistent with that guidance.
Step 1:
*

Revenue recognition
Page *
with a customer to transfer a service or good to the
customer.Each separate performance obligation must be
identified by the entity by evaluating the goods or services
promised in the contract and determining which of these (or
which bundles of goods and services) is distinct. If goods or
services are not distinct, then they should be bundled together
and considered as one performance obligation.
Step 2:
*
Revenue recognition
Page *
A good or service is considered distinct if it meets the
following criteria per ASC 606-10-25-19:The customer can
benefit from the good or service either on a stand-alone basis or
along with another resource that is readily available to the
contract).

Step 2:
*
Revenue recognition
Page *
Factors that indicate goods/services are not distinct include the
following:The goods or services are highly interrelated and the
entity must provide a significant service to integrate the goods
or services into the combined item(s) for the customerThe goods
or services are significantly modified or customized in order to
fulfill the contract.
Step 2:
*
Revenue recognition
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Example 1
An entity licenses customer relationship management software
to a customer. In addition, the entity promises to provide
consulting services to significantly customize the software to
the customer’s information technology environment for total
consideration of $600,000. Are the software and consulting

services one performance obligation or two?
*
Revenue recognition
Page *
The entity is providing a significant service of integrating the
goods and services (the license and the consulting services) into
the combined item for which the customer has contracted. The
software is significantly customized by the entity in accordance
with the specifications negotiated with the customer. Thus, the
goods and services are not distinct as the criterion that the
customer can benefit from the customer management software
on a stand-alone basis has not been met. Therefore, the entity
would account for the license and consulting services together
as one performance obligation.
Example 1 solution
*
Revenue recognition
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customer.
In determining the transaction price, there are several things to
consider, including:Variable considerationThe time value of
moneyNoncash considerationsConsiderations payable to a
customer
Step 3:
*
Revenue recognition
Page *
Contract consideration could be variable due to the existence of
concessions, etc.If the consideration specified in the contract is
variable and it is probable that a significant revenue reversal
will not occur, then the entity should include an estimate of the
variable consideration to which the entity will be entitled in
order to determine the transaction price.
Determine the transaction price – variable consideration
Step 3:
*
Revenue recognition
Page *

The entity may use one of two estimation methods as described
below based on the guidance in ASC 606-10-32-8. The chosen
method should be applied consistently throughout the contract.
The expected value method: the estimate is measured as “the
sum of the probability-weighted amounts in a range of possible
consideration amounts.” This method may be most appropriate
when there are a large number of similar contracts.The most
likely amount method: the estimate is measured as “the single
most likely amount in a range of possible consideration
amounts.” This method may be most appropriate when there are
only two possible outcomes (e.g., either a bonus is received or
not received)
Determine the transaction price – variable consideration
Step 3:
*
Revenue recognition
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Example 2
Catherine’s Costumes sells 1,000 Halloween costumes to a
wholesaler for total consideration of $20 per costume. The
contract provides the customer with the right to return all
unsold costumes after Halloween. Due to its extensive
experience in this industry, Catherine’s Costumes can reliably
provide the following range of probability of returns based on
this sales volume. What is the estimated transaction price for
the contract if Catherine’s Costumes uses the expected value
method? The most likely amount method? Costumes

returnedProbability5040%7545%10015%
*
Revenue recognition
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Expected value method: the estimated contract price is
measured using the sum of the probability-weighted amounts in
the range of possible consideration amounts. Therefore, the
calculation is as follows:
Estimated contract price = (950 x 40% x $20) + (925 x 45% x
$20) + (900 x 15% x $20)
= $7,600 + $8,325 + $2,700
= $18,625
Most likely amount method: based on the highest probability of
45% for 75 costumes being returned, this would be considered
the most likely amount. Therefore, Catherine’s Costumes will
calculate using 925 costumes multiplied by $20 per costume for
a total estimated contract price of $18,500.

Example 2 solution
*
Revenue recognition
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If the time between (1) when the entity provides the goods or
services and (2) the customer makes the payment for these
goods or services is more than one year, the entity may need to
adjust the amount of the consideration to reflect the time value
of money. When adjusting for a financing component, the
discount rate should be based on the credit characteristics of the
party receiving the financing at the inception of the contract.Per
ASC 660-10-32-16, if the contract has a financing component
that is significant to the contract, then the entity should only
recognize revenue at an amount that reflects what the cash
selling price would be at the point that the goods or services
were transferred. The impact on net income of this financing
component should be presented separately on the statement of
comprehensive income as interest income or expense.
Determine the transaction price – the time value of money
Step 3:
*
Revenue recognition
Page *

The following factors should be considered by the entity when
determining whether the financing component is significant:The
expected length of time between payment and transfer of the
goods or servicesWhether the amount of consideration would
differ substantially if the customer paid cash promptly in
accordance with typical credit terms in the industryThe
differences between the interest rate in the contract and the
prevailing interest rates in the market
Determine the transaction price – the time value of money
Step 3:
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Revenue recognition
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Example 3Madison Wholesalers (MW) enters into a contract
with a customer to sell a product for $200,000. The product
will be delivered in two years, but the customer pays for it
today. MW is effectively the party receiving the financing.
Based on MW’s credit characteristics, its interest rate is 5%
annually.Would you assess that the financing component of the
contract is significant? Explain.What are the journal entries
that Madison Wholesalers will record over the two-year period?
*

Revenue recognition
Page *
Is the financing component significant to the contract?
In evaluating whether the financing component is significant,
one could argue that a two-year period of time between the
payment and the transfer of the goods is significant. One could
also argue that the amount of consideration would differ
significantly based on Madison Wholesaler’s interest rate of
5%. Therefore, given the significance of the financing
component, this should be recognized in the revenue amount.
Example 3 solution
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Revenue recognition
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What are the journal entries that Madison Wholesalers will
record over the two-year period?
At the date that Madison Wholesalers receives the cash,
Madison Wholesalers should make the following entry:
Cash $200,000
During the two-year period, Madison Wholesalers will
recognize interest expense of $20,500 (200,000 x (1.052-1)).
Interest expense $20,500

When the product is transferred in two years, Madison
Wholesalers will recognize revenue based on the balance of the
deferred revenue account.
Revenue $220,500
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Per ASC 660-10-32-21, if the consideration that the entity
receives is noncash, the transaction price is measured as the fair
value of the noncash consideration at the contract’s inception.
Per ASC 660-10-32-22, if the fair value of the noncash
consideration cannot be reliably measured, then the transaction
price is measured as the standalone selling price of the goods or
services promised to the customer in the contract.
Determine the transaction price – noncash consideration
Step 3:
*
Revenue recognition

Page *
Example 4
ABC Computing provides computer installation services to a
customer. The standalone value of these services is $4,300. In
exchange, the customer gave ABC Computing several used
computers. These used computers have a fair value of
$4,500.What is the journal entry that ABC Computing will make
to record the sale? What would the journal entry be if the fair
value of the used computers was not available?
*
Revenue recognition
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See guidance in ASC 606-10-32-21 and 22.
What is the journal entry that ABC Computing will make to
record the sale?
ABC Computing will record the transaction price as the fair
value of the noncash consideration received.
What would the journal entry be if the fair value of the used
computers was not available?
If the fair value of the computers is not available, ABC
Computing will record the transaction at the standalone selling
price of the services.

Example 4 solution
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Revenue recognition
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If an entity expects to pay a customer an amount in the form of
cash, “… credit or other items (for example, a coupon or
voucher) that can be applied against amounts owed to the entity
…,” this is referred to as a consideration payable.
Consideration payable to a customer should be treated as a
reduction of the transaction price unless the payment is in
exchange for a distinct service or good.
Determine the transaction price – consideration payable (ASC
606-10-32-25)
Step 3:
*
Revenue recognition
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Example 5
MMR Wholesalers sells 500 machine-embroidered tote bags to a
customer for $25 per bag in the first quarter of the year. MMR

Wholesalers has a contract with the customer that if they
purchase more than 3,000 tote bags during the year, they will
receive a retroactive, $5-per-bag discount. In the first quarter,
MMR Wholesalers does not anticipate that the customer will
earn the volume discount. However, during the second quarter,
the customer purchases 3,000 bagsWhat is the amount of
revenue that MMR Wholesalers will record in the first quarter?
The second quarter?
*
Revenue recognition
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record in the first quarter?
MMR Wholesalers records the transaction price of $25 per bag
in the first quarter because it does not anticipate that the
customer will earn the discount. Consequently, MMR
Wholesalers will record total revenue of $12,500 in the first
quarter (500 bags x $25 per bag).
record in the second quarter?
As the customer has earned the volume discount, MMR
Wholesalers will report revenue of $57,500. This amount is
calculated as follows:
Example 5 solutionAmountCalculation$60,000 3,000 bags sold
in second quarter x $20 ($25 per bag less $5-per-bag volume
discount) (2,500)500 bags sold in first quarter x $5-per-bag
volume discount$57,500Revenue to recognize

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If the contract has multiple performance obligations, then the
transaction price should be allocated across the performance
obligations.The entity first determines the standalone selling
price of each good or service underlying each performance
obligation at the inception of the contract. Per ASC 606-10-32-
31, the standalone selling price is the amount that the seller
would charge if it were to sell the good or service separately.
The best way to determine the standalone selling price is to use
the price the seller would actually charge when it sells the same
good or service to similar customers under similar
circumstance.
obligations in the contract
Step 4:
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Example 6
LEDD Company enters into a contract with a customer to sell
three products for a total transaction price of $50,000. Each
product is appropriately classified as a separate performance
obligation. LEDD Company typically sells these three products
on a standalone basis for the following prices:How should
LEDD Company allocate the transaction price to the three
products?ProductStandalone selling
priceA$10,000B22,000C20,000Total$52,000
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LEDD Company should allocate the $50,000 transaction price
based on the products’ relative, standalone selling prices as
follows:

Example 6 solutionProductStandalone selling pricePercentage
Allocated transaction priceA$10,00019.2%$
9,600B22,00042.3%21,150C20,00038.5%19,250Total$52,00010
0.0%$50,000
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Per ASC 606-10-32-34, if the seller cannot directly observe a
standalone selling price, the seller must estimate a standalone
selling price. (Note: vendor-specific objective evidence is not
required.) The following methods are suitable:Adjusted market
assessment approach: the entity estimates the price that
customers in the market in which it sells the goods or services
would be willing to pay. This approach might include referring
to prices charged by competitors.Expected cost plus a margin
approach: the entity forecasts the costs associated with
providing the good or service and adds an appropriate
margin.Residual approach: the entity estimates the standalone
selling price by subtracting the standalone selling prices of the

goods or services that underlie the other performance
obligations from the total transaction price. (Note: this method
can only be utilized when the same good or service is sold to
different customers and the standalone selling price is highly
variable or when the good or service has not been previously
sold.)
Step 4:
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If the sum of the standalone selling prices is greater than the
transaction price, then the entity typically should allocate the
discount to the separate performance obligations on a relative,
standalone-selling-price basis. There are exceptions to this rule
under which a discount may not be allocated to all performance
obligations if certain criteria are met. The details of which are
not covered in this lecture material.If the transaction price
includes an amount that is contingent on a future event or
circumstance, it generally should be allocated to the separate
performance obligations.
Step 4:
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Example 7
Hammond Industries enters into a contract with a customer to
sell three products for a total transaction price of $430,000.
Each product is appropriately classified as a separate
performance obligation. Hammond Industries sells products A
and B on an individual basis. Product C is a new product that
has not been previously sold. Hammond Industries must
estimate the allocated standalone selling prices.
Information related to these three products is provided in the
following table.How should Hammond Industries allocate the
transaction price to the three products using the adjusted market
assessment approach? The cost plus margin approach? The
residual approach?ProductStandalone selling priceMarket
competitor pricesForecasted costA$100,000$ 99,000$
79,000B250,000255,000200,000CNot available 85,000
65,000Total$439,000$344,000

*
Revenue recognition
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Adjusted market assessment approach: Hammond Industries
should allocate on a relative basis as follows:
Example 7 solutionProductMarket competitor pricesPercentage
of total Allocated transaction priceA$ 99,00022.55%$
96,965B255,00058.09%249,787C 85,000 19.36%
83,248Total$439,000100.00%$430,000
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Revenue recognition
Page *

Expected cost plus margin approach
Given a total cost of $344,000 and a total transaction price of
$430,000, an appropriate margin would be 25%
($430,000/$344,000). Thus, to get the allocated transaction
price for each product, we multiply the forecasted cost of each
product by 1.25.
:
Example 7 solution (continued)ProductForecasted costAllocated
transaction priceA$ 79,000$ 98,750B200,000250,000C
65,000 81,250Total$344,000$430,000
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Revenue recognition
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Residual approach
Using the residual approach, the standalone selling prices that
are available for products A and B are reduced from the total

transaction price to arrive at the standalone selling price for
product C, which is $80,000.
Example 7 solution (continued)ProductStandalone selling
priceA$430,000 B(100,000)C (250,000)Total$ 80,000
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Revenue recognition
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The entity should recognize as revenue the amount of the
transaction price allocated to a performance obligation when it
satisfies that performance obligation by transferring a good or
service to a customer. Transfer occurs when the customer
obtains control of the asset. ASC 606-10-25-25 defines control
as “the ability to direct the use of and obtain substantially all of
the remaining benefits from the asset.”
satisfied
Step 5:

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Revenue recognition
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Performance obligations may be satisfied at a point in time or
over time. At a point in time: per ASC 660-10-25-30, if
satisfied at a point in time, then revenue is recognized when
control is transferred. Some indications of change in control
are as follows:The seller has a present right to payment.The
customer has a legal title to the asset.The seller has transferred
physical possession of the asset to the customer.The customer
has significant risks and rewards of ownership of the asset.The
customer has accepted the asset.
Step 5:
satisfied
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Revenue recognition
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Example 8
Kentucky Associates enters into a contract to sell a product to a
customer. The product is shipped free on board shipping
point.Should Kentucky Associates recognize revenue when the

product is shipped or received by their customer?
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Revenue recognition
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Example 8 solution
See the guidance in ASC 606-10-25-30.
Kentucky Associates can recognize revenue when the product is
shipped because the customer obtains control of the product
when it is shipped. Although the customer doesn’t have
physical possession of the product when it is shipped, it has
legal title and the risks and rewards of ownership.
*
Revenue recognition
Page *
Over time, per ASC 606-10-25-27:An entity “satisfies a
performance obligation and recognizes revenue over time if one
of the following criteria is met”:The customer is receiving and
consuming the benefits of the seller’s performance as the seller
performs.The seller creates or enhances an asset that the
customer controls as it is created or enhanced.The asset created

by the seller does not have an alternative use and the seller has
a right to payment for performance completed to date.
Step 5:
satisfied
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Revenue recognition
Page *
If a performance obligation is satisfied over time, then revenue
should be recognized in accordance with the progress toward
completion of the performance obligation, if the entity can
reasonably measure its progress toward completing the
obligation. In measuring progress, either input or output
methods may be used. The method an entity chooses should best
depict the entity’s transfer of control of promised goods or
services. Additionally, this method should be used for all
similar performance obligations and in similar
circumstances.Input method: per ASC 606-10-55-20, revenue is
recognized based on the seller’s efforts or inputs toward
completion of the performance obligation.Output method: per
ASC 606-10-55-17, revenue is recognized based on the value (to
the customer) of the goods or services that have been
transferred.If an entity cannot reasonably measure its progress
toward completion of its performance obligation and it expects
to recoup its cost, the entity can recognize revenue to the extent
of incurred costs.
Step 5:
satisfied

*
Revenue recognition
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Example 9
The Paving Job Giant Company (PJG) has extensive experience
in the road construction business. PJG has an excellent track
record in estimating costs of projects and is a very efficient
construction company. PJG has entered into a two-year contract
to build a 25-mile toll road for $50 million. The toll road is
adjacent to an old gravel road. The toll road operator plans on
opening the toll road in five-mile sections as the paving is
completed. PJG estimates this project will require $30 million
of road construction material and 400,000 construction hours at
an average cost of $25 per hour.
At the end of year one, 10 miles of toll road have been turned
over and are in use by the toll road operator. Some work has
also been done on the next section of the road. Road material
costs of $15 million and 200,000 construction hours have been
incurred.What revenue should PJG record for this performance
obligation at the end of year one using the input method? The
output method?
*

Revenue recognition
Page *
Example 9 solution
Input method:
ASC 606-10-55-20 indicates revenue using the input method
should be based on the seller’s efforts to satisfy its performance
obligation. PJG has incurred 50% of the road material costs
($15 million/$30 million) and 50% of the construction hours
(200,000 hours/400,000 hours). Therefore, $25 million should
be recognized as revenue at the end of year one, calculated as
50% of the $50 million.
Output method:
ASC 606-10-55-17 indicates revenue using the output method
should be based on the value of the goods transferred to the
customer. PJG has completed 10 miles of road and turned them
over to the toll road operator. The remaining 15 miles are not
currently available to the toll road operator. Therefore, $20
million should be recognized as revenue at the end of year one,
calculated as 40% (10 miles/25 miles) of the $50 million.
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Revenue recognition
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Incremental costs of obtaining a contract
The incremental costs of obtaining a contract, such as a sales
commission, should be recorded as an asset, if the entity

expects to recover those costs. As a practical expedient, these
incremental costs can be expensed if the amortization period
would be one year or less. Generally, costs that would have
been incurred whether or not the contract was obtained should
be expensed when incurred.
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Revenue recognition
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Costs of fulfilling a contract
An entity should record an asset for the cost to fulfill a contract
only if all the following criteria are met:The costs relate
directly to a contract or an anticipated contract.The costs relate
to resources the entity will used to satisfy performance
obligations in the future.The costs are expected to be recovered.
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Revenue recognition
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The key principle is to help users of financial statements
understand the amount, timing and uncertainty of revenue and
cash flows arising from contracts with customers. There are
three broad disclosure requirements that will present both
qualitative and quantitative information about:Contracts with

customersSignificant judgments and changes in judgments made
in applying the guidance to those contracts.Assets recognized
from costs to obtain or fulfill a contract.There are more
disclosure requirements for public companies than for nonpublic
companies.There is some divergence between US GAAP and
IFRS as it relates to interim disclosure requirements.
Disclosures
*
Identify the contract(s) with a customer
A contract is an agreement between two or more parties that
creates enforceable rights and obligations.
Contract criteria:The contract must be approved by all parties to
the contract and they must be committed to perform their
obligations.Each party’s rights regarding the goods and services
to be transferred must be identifiable.The payment terms must
be identifiable.The contract must have commercial substance.It
must be probable that a vendor will collect the consideration to
which it is entitled in exchange for the goods or services
expected to be delivered.
with a customer to transfer a service or good to the customer.
Good or service is distinct if both criteria are met:The customer
can benefit from the good or service either on a stand-alone
basis or along with resources that are readily available to the

contract).
customer.
Several considerations:Variable consideration: contract
consideration could be variable due to the existence of
concessions, etc.Time value of money: may need to adjust the
amount of consideration for the time value of money if the time
between (1) when the entity provides the goods or services and
(2) the customer makes the payment for these goods or services
is more than one year.Noncash considerationConsideration
payable: if an entity expects to pay a customer an amount in the
form of cash, credit or other that can be applied to amounts
owed to the entity.
obligations If the contract has multiple performance obligations,
then the transaction price should be allocated across the
performance obligationsAllocate based on standalone selling
priceIf the standalone selling price is not available, estimate the
standalone selling price.
1
2
3
4
Recognize revenue when (or as) the entity satisfies a
performance obligation
Transfer occurs when the customer obtains control of the asset.

At a point in time:Seller has a present right to
payment.Customer has legal title to the asset.Seller has
transferred physical possession of the asset to the
customer.Customer has significant risks and rewards of
ownership.Customer has accepted the asset.
Over time :Customer receiving/consuming benefits as the seller
performs.Seller creates/enhances asset that the customer
controls as it is created/ enhanced.Asset has no alternative use
and the seller has a right to payment for performance completed
to date.
5
*
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About EY
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on our promises to all of our stakeholders. In so doing, we play
a critical role in building a better working world for our people,
for our clients and for our communities.
EY refers to the global organization, and may refer to one or

more, of the member firms of Ernst & Young Global Limited,
each of which is a separate legal entity. Ernst & Young Global
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services to clients. For more information about our
organization, please visit ey.com.
About the Ernst & Young Academic Resource Center
The Ernst & Young Academic Resource Center (EYARC) is an
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support higher education. The EYARC develops and provides
free curriculum resources and other educational support to
address leading-edge issues impacting the accounting
profession. The EYARC is yet another example of the
commitment of the global EY organization and the Ernst &
Young Foundation to the academic community. The Ernst
& Young Foundation is a 501(c)(3) tax exempt corporation
associated with Ernst & Young LLP, which funds the
Foundation, together with its present and former partners,
principals and staff.
© 2016 Ernst & Young Foundation (US).
All Rights Reserved.
SCORE No. 00220-161US
www.ey.com/us/arc
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