New Revenue Recognition Guidance

Step 1: Identify the Contract with the Customer

Contract should meet the following conditions:

  • Two or more parties
  • Each parties’ rights to goods and services are identifiable
  • Commercial substance
  • Enforceable terms
  • It is probable that the seller will collect the consideration

Step 2: Identify the Performance Obligations in the Contract

Performance obligations are the promises in the contract to transfer a good or service to the customer. A good or service is distinct if both of the following criteria are met:

  • Capable of being distinct—the customer can benefit from the good or service on its own or together with other resources readily available to the customer
  • Distinct within the contract—separately identifiable and not highly dependent on other promised goods or services in the contract

Step 3: Determine the Transaction Price

  • The Transaction Price is the expected amount of value that the company is entitled to for the goods and services transferred to the customer
  • Variable / contingent consideration must be estimated at the beginning of the contract
  • Up-front fees are not recognized separately, unless they can be associated with a distinct good or service transferred to the customer

Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract

  • The allocation of the transaction price to the performance obligations is based on the relative stand-alone selling price of each performance obligation
  • Stand-alone selling price can be:
    • The actual market price (“observable price”), or
    • An estimation of the market price

Step 5: Recognize Revenue when (or as) each Performance Obligation is Satisfied

  • The key to satisfy a performance obligation is the transfer of control of the product or service to the customer
  • “Control is the ability to direct the use of, and obtain substantially, all of the remaining benefits from the asset”
  • A high level of judgement is needed to determine when control is transferred

The steps above represent summarized extracts and are provided for illustrative purposes only. These steps are qualified in their entirety by reference to the complete standard as issued  by the Financial Accounting Standards Board.

Please contact your Elliott Davis advisor for more information related to the new revenue recognition standard.