Financial Transactions & Standards (FAR)

What are the five steps of the ASC 606 revenue recognition model, in order?

(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.

Under ASC 606 Step 1, what five criteria must be met for a contract with a customer to exist?

(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).

Under ASC 606 Step 2, when is a promised good or service a distinct performance obligation?

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).

ASC 606 Step 5: what three criteria, if any is met, require revenue to be recognized OVER TIME (rather than at a point in time)?

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.

Worked: A contractor has a $1,000,000 contract recognized over time using cost-to-cost (input method). Costs incurred to date are $300,000 of $750,000 total estimated costs. How much revenue is recognized 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.