Previously, we introduced the new Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts from Customers. Although this standard is specific and all-encompassing, framework is provided for assistance. Step One begins by assisting companies with identifying contracts with customers. In Step Two, we dive into identifying performance obligations within the contracts.
Step Two: Identifying Performance Obligations in the Contract
Once a contract has been identified, Step Two of the ASU standard can be attended to by the business entities. Step Two assesses goods or services that are performed in the contract. Most of the time, this has to do with consumer goods.
Goods and Services That Are Distinct
Criteria that must be met in order for this to happen: First, the customer must benefit from the performance obligation on its own and not in conjunction with something else. These are items that can be sold or used separately, and these are most often consumer goods. Second, the good or service must be separately identified from other promises within the contract. In order to identify these goods/services the company must not provide integration services from that good/service, significantly alter other promised products, or would not affect other products promised in the contract should the customer decide to not purchase the good/service. An example of this would be a car maintenance package sold in conjunction with a new car purchase. The customer has, in this case, a distinct service because the customer would benefit individually, and this would be a separately identified good or service.
Distinct Series of Goods or Services
In order for this to be identified, the goods must be substantially the same such as a monthly delivery service which is part of a yearlong subscription. For goods or services to have the same pattern of transfer to a customer, each performance obligation must be satisfied over time, thus recognizing revenue over time. There are criteria for this: the consumer receives and consumes the benefit from the good/service at the same time it is provided by the company (i.e. yearlong subscriptions). Next, the company’s performance creates an asset that the customer controls as the asset is created or enhanced. For example, the creation of a shopping plaza where new shops are added later, and this addition would provide benefits to the community. Lastly, performance does not create an asset with an alternative use to the company, and the company has a right to payment for performance that is enforceable to date. This is usually the case with very specific services, such as specialized software or a device manufactured for a specific customer.
Two Criteria for Distinct Services/Goods Pattern of Transfer:
Point in Time
This is when the company has the immediate right to payment for the asset and where the asset has been transferred to the customer legally. This includes the title, possession, risks and rewards being transferred to the customer.
In this situation, revenue is recognized over time, with a single method applied over time, with similar obligations provided consistently. This creates or enhances assets, gives the company a right to payment, and the customer simultaneously receives and consumes services/goods.
Contact Lawhorn CPA Group
As we continue to drive into the Steps laid out by the IRS within the Revenue from Contracts with Customers, Lawhorn CPA Group has diligently combed over ways to serve clients in this area. Direction from an accountant regarding this standard and corresponding disclosures is available. Reach out today via our website or by calling us at 865-212-4867.