Financial Transactions & Standards (FAR)

(1) Identify the contract with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations; (5) Recognize revenue when (or as) each performance obligation is satisfied.

(1) The parties have approved the contract and are committed to perform; (2) each party's rights regarding goods/services are identifiable; (3) payment terms are identifiable; (4) the contract has commercial substance; and (5) it is probable the entity will collect the consideration it is entitled to (a collectibility threshold).

When BOTH: (a) the customer can benefit from the good/service on its own or with readily available resources (capable of being distinct), AND (b) the promise is separately identifiable from other promises in the contract (distinct within the context of the contract — not highly interdependent, integrated, or significantly modifying one another).

Revenue is recognized over time if any one is met: (1) the customer simultaneously receives and consumes the benefits as the entity performs; (2) the entity's performance creates or enhances an asset the customer controls as it is created; or (3) performance creates an asset with no alternative use to the entity AND the entity has an enforceable right to payment for performance completed to date.

Percent complete = $300,000 / $750,000 = 40%. Revenue recognized to date = 40% × $1,000,000 = $400,000. Gross profit to date = $400,000 − $300,000 = $100,000.

(1) Expected value — the probability-weighted sum of possible amounts; best when the entity has a large number of contracts with similar characteristics. (2) Most likely amount — the single most likely outcome; best when there are only two possible outcomes (e.g., a bonus is earned or not).