Part two of a 6-part series
The core principle of the new guidelines is to recognize revenue to depict the transfer of promised goods or service to customers in an amount that reflects the consideration to which the entity expects to be entitled for those goods or services. That is, the aim is to recognize revenue consistently as the customer assumes ownership of the various components of a contract, and values the revenue at that obligation’s appropriate share of the expected revenue.
Steps to achieve this core principle:
Your organization sells a computer system and printer to a customer for $1,000. The computer and software are delivered to the customer in June but, due to manufacturing delays, the printer is delivered in July. Under the new Performance Obligation guidelines, when is the revenue for the various components of the contract to be recognized?
1. A contract is established for a computer system
2. Consisting of three performance obligations:
a. Laptop computer
3. The overall transaction price is $1,000
4. The company’s standalone selling prices are:
a. Laptop: $800
b. Printer: $200
c. Software: $200
Under the contract, then, the performance obligations are assigned transaction prices of:
a. Laptop: $1,000 / 1200 * 800 = $666.67
b. Printer: $1,000 / 1200 * 200 = $166.67
c. Software: $1,000 / 1200 * 200 = $166.67
Once either party has acted on the contract (i.e., at the earlier of the customer accepting an invoice or the vendor commencing shipping), the vendor accrues the liability to the customer for each performance obligation at the assigned revenue valuations.
5. Upon delivery of the laptop and software, the vendor recognizes $833.33 in June. At the end of June, the balance sheet shows an accrued liability to the customer of $166.67 for the printer. In July, when the client takes ownership of the printer, the vendor recognizes $166.67.
Do the new revenue recognition guidelines affect you? Part 3 of this series, “Who is Affected?” may help you answer that question.