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Financial Accounting and Reporting/Blueprint/3.C

Revenue recognition

Area 3: Select Transactions (25-35%)

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Topics

  • ASC 606 five-step model
  • Contract costs and modifications
  • NFP contribution recognition

Lessons

  • Revenue RecognitionFree

Study Frameworks

Revenue Recognition (ASC 606)

ASC 606 — Five-Step Model
Step 1: Identify the contract
Step 2: Identify performance obligations
Step 3: Determine transaction price
Variable consideration
Significant financing component
Non-cash consideration
Consideration payable to customer
Step 4: Allocate to performance obligations
Step 5: Recognize when/as obligations are satisfied
Point in time
Over time

Revenue Recognition: Over Time or Point in Time? (ASC 606 Step 5)

Does the customer simultaneously receive and consume the benefits as the entity performs (e.g., routine services)?
Yes
Recognize revenue over time
No
Does the entity's performance create or enhance an asset that the customer controls as it is created (e.g., building on customer's land)?
Yes
Recognize revenue over time
No
Does the entity's performance create an asset with no alternative use to the entity, AND does the entity have an enforceable right to payment for performance completed to date?
Yes
Recognize revenue over time (measure progress using input or output method)
No
Recognize revenue at a point in time — when control transfers to the customer

Revenue Recognition — Contract Assets and Liabilities

SituationBalance Sheet ClassificationExplanation
Performance satisfied BEFORE payment dueContract Asset (receivable if unconditional)Entity has earned revenue but right to payment is conditional on something other than passage of time
Performance satisfied AND payment is unconditionalAccounts ReceivableEntity has an unconditional right to consideration — only passage of time before payment is due
Payment received BEFORE performanceContract Liability (deferred/unearned revenue)Entity has obligation to transfer goods/services for consideration already received
Costs to obtain a contract (e.g., sales commissions)Contract Cost Asset (capitalize if >1 year benefit)Amortize on a systematic basis consistent with transfer of goods/services; expense if amortization period ≤ 1 year (practical expedient)

ASC 606 Variable Consideration Methods

MethodWhen to UseCalculation
Expected valueLarge number of similar contractsProbability-weighted sum of possible amounts
Most likely amountBinary outcomes (e.g., bonus met or not)Single most likely outcome in the range
CARINVContract identified, Approval/commitment, Rights identifiable, IN-substance commercial, Variable/fixed consideration measurable

The five criteria that must all be met to identify a contract under ASC 606 Step 1.

SOARSimultaneous receive/consume, Or asset customer controls, Alternative use none + Right to payment → Over time

The three criteria for recognizing revenue over time under ASC 606 Step 5. If any one is met, recognize over time. If none are met, recognize at a point in time when control transfers. SOAR: if the performance obligation can SOAR over time, revenue does too.

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