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CHAPTER 5 Revenue Recognition and Profitability Analysis 237 Recognizing Revenue for Contracts that Contain Multiple Performance Obligations Revenue recognition becomes m ore complicated when a contract contains multiple performance obligations. As an example, in Illustration  5–7 we combine the two TrueTech examples we already have discussed. In the first example ( Illustration 5–4 ), TrueTech sold Tri-Box modules and recognized revenue at a single point in time (upon delivery). In the second example ( Illustration 5–6 ), TrueTech sold one-year subscriptions to the Tri-Net platform and recognized revenue over time (one-twelfth each month over the year). Now, let’s consider how TrueTech would recognize revenue if these two items were sold as a package deal for a single price. ● LO5–4 FINANCIAL Reporting Case Q2, p. 231 TrueTech Industries manufactures the Tri-Box System, a multiplayer gaming system allowing players to compete with each other over the Internet. • The Tri-Box System includes the physical Tri-Box module as well as a one-year subscription to the Tri-Net multiuser platform of Internet-based games and other applications. • TrueTech sells individual one-year subscriptions to the Tri-Net platform for $60. • TrueTech sells individual Tri-Box modules for $240. • As a package deal, TrueTech sells the Tri-Box System (module plus subscription) for $250. On January 1, 2016, TrueTech delivers 1,000 Tri-Box Systems to CompStores at a price of $250 per system. TrueTech receives $250,000 from CompStores on January 25, 2016. Illustration 5–7 Contract Containing Multiple Performance Obligations We’ll assume TrueTech has concluded that it has a contract with CompStores, so step 1 of revenue recognition is satisfied. We’ll start with step 2. Step 2: Identify the Performance Obligation(s) Sellers account for a promise to provide a good or service as a performance obligation if the good or service is distinct from other goods and services in the contract. The idea is to separate contracts into parts that can be viewed on a stand-alone basis. That way the financial statements can better reflect the timing of the transfer of separate goods and services and the profit generated on each one. Goods or services that are not distinct are combined and treated as a single performance obligation. A good or service is distinct if it is both: 1. Capable of being distinct. The customer could use the good or service on its own or in combination with other goods and services it could obtain elsewhere, and 2. Separately identifiable from other goods or services in the contract. The good or service is distinct in the context of the contract because it is not highly interrelated with other goods and services in the contract. The first criterion is clear, but the second, “separately identifiable from other goods and services in the contract,” needs some explanation. In some contracts, performance obligations are so intertwined that it doesn’t make sense to view them separately. For example, in most long-term construction contracts, the seller’s role is to combine many products and services, such as lumber, concrete, design, electrical, plumbing, and actual construction, to provide a single completed building or other constructed asset to the customer. Therefore, each of these separate products and services are not considered distinct in the context of a contract. As we discuss further in Part C of this chapter, most long-term construction contracts are viewed as including a single performance obligation because the individual goods and services needed to construct the asset are highly interrelated. Even though these goods and services might be capable of being distinct outside the context of the contract, the contract Promises to provide goods and services are performance obligations when the goods and services are distinct .


Spiceland_Inter_Accounting8e_Ch05
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