Kieso $18,$ Ch $17$

Revenue Recognition

Standard for Revenue Recognition: Revenue from Contracts with Customers

Asset$-$Liability Approach $-$ Account for revenue based on asset or liability arising from contracts with customers.

Contracts $(1)$ indicate terms and measurement of consideration and $(2)$ specify promises that must be met by each party.

Key Objective: Recognize revenue to depict transfer of goods or services to customers in amount that reflects the consideration that the company receives or expects to receive in exchange for goods or services.

Five$-$Step Process for Revenue Recognition:

Identify the contract with customers.

Identify the separate performance obligations in the contract.

Determine the transaction price.

Allocate the transaction price to the separate performance obligations.

Recognize revenue when each performance obligation is satisfied.

Revenue Recognition Principle: Recognize revenue in the accounting period when the performance obligation is satisfied.

See BEAN for example of Five$-$Step Process: pp$.17-3$ to $17-6.$

Explain and apply the five$-$step revenue recognition process:

Identify Contract with Customers $($Step $1)-$A contract is an agreement between two or more parties that creates enforceable rights or obligations. It can be written, oral, or implied by customary business practice. See Example $17\mathrm{.}1,$ p $17-7.$

Identify Separate Performance Obligations $($Step $2)-$A performance obligation is a promise to provide a distinct product or service to a customer. A product or service is distinct when customer is able to benefit from a good or service on its own or together with other readily available resources. See Examples $17\mathrm{.}3$ and $17\mathrm{.}4,$ pp$.17-9$ to $17\mathrm{.}10.$

Determine Transaction Price $($Step $3)-$Transaction price is the amount of consideration that company expects to receive from customer. May be fixed or variable. When estimating variable consideration may use Expected Value $($probability$-$weighted amount in range of possible amounts$)$ or Most Likely Amount $($may be appropriate if contract has only two possible outcomes$).$ See Example $17\mathrm{.}5,$ pp$.17-10$ to $17-11.$ Also See Illustration $17\mathrm{.}4,$ p$.17-14$ for Transaction Price Summary.

Allocating Transaction Price to Separate Performance Obligations $($Step $4)-$Based on relative fair values $($what company could sell good or service for on standalone basis. See Examples $17\mathrm{.}9,17\mathrm{.}10$ and $17\mathrm{.}11,pp\mathrm{.}17-15$ to $16.$