Int. Acc. FA LECT 2&3: Revenue recognition part 4 (SUMMARY 5 STEPS…
Int. Acc. FA LECT 2&3: Revenue recognition part 4
STEP 4 ALLOCATE TRANSACTION PRICE
Usually: standalone selling price.
What if this isn’t available? Use best estimate
Expected cost plus a margin approach
Adjusted market assessment approach
Allocation should be based on relative fair value
Separation of performance obligations helped
Apple to recognize more revenue upfront.
: revenue had to be recognized over 2 years.
: recognize revenue from hardware immediately, service revenue deferred.
STEP 5 RECOGNIZE REVENUE
When is a performance obligation satisfied? Customer obtains control of the good or service.
When is control obtained?
Company has transferred legal title to the asset
Company has transferred physical possession of the asset
Company has a right to payment for the asset
Customer has significant risks/rewards of ownership
Customer has accepted the asset.
SUMMARY 5 STEPS
Determine the transaction price
Consideration expected to be received from customer in exchange for service/good.
Allocate the transaction price to the separate performance obligations
Use relative fair values when there are multiple performance obligations
Identify the separate performance obligations in the contract
Performance obligation = promise in contract to provide product/service to customer.
Recognize revenue when each performance obligation is satisfied
Critical aspect: customer obtains control over the asset.
Identify the contract with customers
Contract = agreement that creates enforceable rights or obligation