C3-3

The meaning of control (LO 3-1)

Wilson Corporation repairs rail cars for its clients, a process that often takes several months. As a result, the work on some contracts is done over two accounting periods. Wilson is determining whether it will be able to recognize revenue on such contracts over time and therefore record a portion of the revenue on such contracts before returning the rail cars to the clients.

Wilsons controller has determined that its repairs enhance an asset the customer controls, and therefore Wilson may recognize revenue over time. Wilsons auditor disagrees with Wilsons interpretation, arguing that the customer does not control the asset until Wilson returns it. After all, the auditor says, the customer cannot use or derive any benefit from a rail car that is not in its possession. The auditor suggests that Wilson re-read ASC paragraph 606-20-25-25, which states

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Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

1. Using the asset to produce goods or provide services (including public services)
2. Using the asset to enhance the value of other assets
3. Using the asset to settle liabilities or reduce expenses
4. Selling or exchanging the asset
5. Pledging the asset to secure a loan
6. Holding the asset.

In addition to his argument that the customer does not control the asset, the auditor notes that Wilson has the ability to prevent others, including the customer, from directing the use of the asset until the repairs are completed and paid for. The customer does not control the rail car while it is being repaired, Wilson Corporation does.

Required:

Draft a memo describing which of the interpretations is correct and why.