- Bob Biehl
- Director, Assurance & Business Advisory Services
- (614) 947-5211
The new standard developed a five-step model for recognizing revenue that will now be applied throughout GAAP, replacing multiple different criteria, thus achieving one of the goals of the new standard: consistency. The only exceptions are contracts that are considered a lease, an insurance contract, a nonmonetary exchanges, a guarantees or those involving financial instruments.
The second step is to determine the performance obligations in each contract. A performance obligation is a promise to deliver a good or provide a service (or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer). It can be implicit or explicit.
Depending on the contract, promised goods or services may include, but are not limited to, the following:
In order to identify performance obligations in each contract, a company needs to determine whether or not the goods or services are distinct. If distinct, a customer can benefit from the good or service on its own (the good or service is separable from the other goods or services in a contract). A good or service is distinct if:
An auto dealer sells a car to a customer for an all-inclusive price that includes the car and three years of free oil changes. This contract would include two performance obligations. The first performance obligation would be for the sale of the car. The second performance obligation would be for the oil changes. The car performance obligation revenue would be recognized upon delivery to the customer. The oil change performance obligation would be recognized over the three-year oil change obligation.
Determining the distinct nature of goods and services will require judgment. ASC 606-10-25-21 provides a list of factors for a company to consider when determining whether there are separate, distinct goods or services in each contract. The company will need to evaluate each contract to determine whether there is more than one performance obligation.
Article written by:
Bob Biehl, CPA, CCIFP