- New standard takes principle-based approach to revenue recognition issue
- A firm should recognize revenue when it has transferred a good or service to a customer
- Five step-process for recognizing revenue
- (1) Identify Contract with a customer
- Contract: agreement with specific rights and obligations
- (2) Identify performance obligation in the contract
- Promise to deliver a distinct good or service
- Customer can benefit from good or service
- Transfer good and service that is separately from any other promises
- Promise to deliver a distinct good or service
- (3) Determine the transaction price
- Amount a firm expected to receive from a customer in exchange for transferring a good or service
- (4) (Combine) Allocate transaction price to the performance obligation in the contract
- (5) Recognize revenue when entity satisfies a performance obligation
- (1) Identify Contract with a customer
Required disclosure under converged standards:
- Contract with customers
- Assets and liabilities related to contracts, including balance and changes
- Outstanding performance obligation and transaction price
- Management judgment used to determine the amount and timing of revenue recognition
Notes: Revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.