FASB ASU 606 Revenue Recognition: Simplify Periodic Revenue Recognition Calculations

By now, everyone has read one or more presentations about the five-step revenue allocation process mandated by FASB ASU 606. This article will suggest methods to make the periodic revenue recognition calculations more manageable once the “Five Step Revenue Allocation” process is complete.

There are many details in the ASU 606 revenue recognition standards. This article makes two points:

1. The "Five Step Revenue Allocation" process will results in one of three types of revenue recognition components:

- Performance Obligations

- Contract Assets - Contract Liabilities

2. The periodic calculation of earned revenue and costs will fit into one os these three forms.

Contract Components

Each contract subject to ASC 606 has some or all of the following components.

1. Contract Performance Obligation are:

- Defined as a promise to transfer a distinct good or service that the customer can benefit from the good or service either on its own or together with other resources readily available to the customer.

-Activities undertaken to fulfill a contract are not considered a performance obligation unless those activities transfer a good or service to a customer.

1. Examples of Incremental Sales Costs (Contract Assets) include:

• Sales Commissions

• Set-up and Mobilization Costs

• R&D to Support the Contract

The standard requires that Incremental Sales Costs be capitalized and amortized proportionately with the Transfer of Goods and Services to the Customer for the related Performance Obligation. The standard provides additional guidance to simplify calculations by declaring that Incremental Sales Costs are related to a single Performance Obligation or the entire contract.

1. Examples of Material Future Benefits (Contract Liabilities) include:

• Price Concessions

• Reward Points

• Return Options

• Performance Bonuses

Summary:

Once the "Five Step Revenue Allocation" process is complete, the information needed to calculate earned revenue includes:

Create periodic reporting to routinely provide these progress measures and organize the calculations into three types to simplify the routine periodic revenue recognition calculations.

Contact us to discuss your firm's contract terms.

Background & Resources

This blog originally appeared in the GP Optimizer Summer 2018 magazine, available here.

The FASB standard can be downloaded from FASB.org here.

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