CHAPTER 5 Revenue Recognition and Profitability Analysis 239 Step 5: Recognize Revenue When (Or As) Each Performance Obligation Is Satisfied As we discussed earlier, performance obligations can be satisfied either at a point in time or over a period of time, and revenue with respect to a performance obligation is recognized when (or as) the performance obligation is satisfied. That timing doesn’t depend on whether a performance obligation is the only one in a contract or is one of several performance obligations in a contract. We determine the timing of revenue recognition for each performance obligation individually. Returning to our TrueTech example, the $200,000 of revenue associated with the Tri- Box modules is recognized when those modules are delivered to CompStores on January 1, but the $50,000 of revenue associated with the Tri-Net subscriptions is recognized over the one-year subscription term. The timing of revenue recognition for each performance obligation is shown in Illustration 5–10 . Revenue with respect to each performance obligation is recognized when (or as) that performance obligation is satisfied. Additional Consideration Discounts in Contracts with Multiple Performance Obligations. Note that Illustration 5–7 shows that Tri-Box systems are sold at a discount—TrueTech sells the system for a transaction price ($250) that’s less than the $300 sum of the stand-alone selling prices of the Tri-Box module ($240) and the subscription to Tri-Net ($60). Because there is no evidence that the discount relates to only one of the performance obligations, it is spread between them in the allocation process. If TrueTech had clear evidence from sales of those goods and services that the discount related to only one of them, the entire discount would be allocated to that good or service. Assume the same facts as in Illustration 5–7 . TrueTech records the following journal entry at the time of the sale to CompStores (ignoring any entry to record the reduction in inventory and the corresponding cost of goods sold): January 1, 2016: Accounts receivable ..................................................... 250,000 Sales revenue ($250,000 3 80%) ............................. 200,000 Deferred revenue ($250,000 3 20%) ...................... 50,000 In each of the 12 months following the sale, TrueTech records the following entry to recognize Tri-Net subscription revenue: Deferred revenue ($50,000 4 12) ................................ 4,167 Service revenue ....................................................... 4,167 After 12 months TrueTech will have recognized the entire $50,000 of Tri-Net subscription revenue, and the deferred revenue liability will have been reduced to zero. Illustration 5–10 Recognizing Revenue for Multiple Performance Obligations Deferred Revenue 1/1 50,000 1/31 4,167 2/28 4,167 . . . . . . 12/31 4,167 12/31 -0- Service Revenue 1/1 -0- 1/31 4,167 2/28 4,167 . . . . . . 12/31 4,167 12/31 50,000 Illustration 5–11 summarizes Part A’s discussion of the fundamental issues related to recognizing revenue.
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