234 SECTION 1 The Role of Accounting as an Information System Illustration 5–2 Key Considerations When Applying the Five Steps to Revenue Recognition Five Steps to Recognizing Revenue For Transactions Involving Single and Multiple Performance Obligations Legal rights of seller and customer established Multiple performance obligations Recognizing Revenue at a Single Point in Time First we consider a simple contract that includes only one performance obligation and is satisfied at a single point in time when goods or services are transferred to a customer. The performance obligation is satisfied when control of the goods or services is transferred from the seller to the customer, and usually it’s obvious that transfer occurs at the time of delivery. In our Macy’s example above, for instance, the performance obligation is satisfied at the time of the sale when the skirt is transferred to Susan. In other cases transfer of control can be harder to determine. Illustration 5–3 lists five key indicators we use to decide whether control has passed from the seller to the customer. Sellers should evaluate these indicators individually and in combination to decide whether control has been transferred and revenue can be recognized. ● LO5–2 FINANCIAL Reporting Case Q1, p. 231 Step 1 Identify the contract No allocation required Allocate a portion to each performance obligation At a point in time Over a period of time At whatever time is appropriate for each performance obligation Amount seller is entitled to receive from customer Amount seller is entitled to receive from customer Single performance obligation Step 2 Identify the performance obligation(s) Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue when (or as) each performance obligation is satisfied The customer is more likely to control a good or service if the customer has: • An obligation to pay the seller. • Legal title to the asset. • Physical possession of the asset. • Assumed the risks and rewards of ownership. • Accepted the asset.7 In Illustration 5–4 we apply these indicators to TrueTech Industries, a company we will revisit throughout this chapter to illustrate revenue recognition. 7These indicators apply to both goods and services. It may seem strange to talk about the customer accepting an asset with respect to a service, but think of a service as an asset that is consumed as the customer receives it. Illustration 5–3 Indicators that Control Has Been Transferred from the Seller to the Customer Illustration 5–4 Recognizing Revenue at a Point in Time TrueTech Industries sells the Tri-Box, a gaming console that allows users to play video games individually or in multiplayer environments over the Internet. A Tri-Box is only a gaming module and includes no other goods or services. When should TrueTech recognize revenue for the following sale of 1,000 Tri-Boxes to CompStores? • December 20, 2015: CompStores orders 1,000 Tri-Boxes at a price of $240 each, promising payment within 30 days after delivery. TrueTech has received the order but hasn’t fulfilled its performance obligation to deliver Tri-Boxes. In light of this and other indicators, TrueTech’s judgment is that control has not been transferred and revenue should not be recognized. (continued)
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