Before considering the factors to be taken into account in determining whether the proportionate performance method or the service concluded should be applied to a service contract, it is important to consider whether the service contract consists of one unit of account or more units of account. This is important because the method to be used is determined on the basis of a unit of account. In other words, where a service contract consists of two services, each representing a unit of account, it is determined separately for each service whether the method of proportional performance or completed service is to be applied. It is conceivable that it may be appropriate to use the proportional performance method for one of the services and the completed performance method for the other. The identification of units of account in a service contract requires consideration of CSA Guidelines 605-25, Revenue Recognition – Multi-Item Arrangements, and possibly other specific guidelines for multi-element agreements in the CSA. While a detailed discussion of these guidelines is beyond the scope of this article, we have a separate white paper, Accounting for Multiple Revenue Delivery Agreements, which summarizes the CSA 605-25 guidelines and provides several examples illustrating the application of these guidelines. To simplify the discussion, the rest of this article assumes that the service contract discussed is a unit of account. b. A set of different goods or services that are essentially the same and have the same model of transfer to the customer. This is a critical step as it affects the amounts and timing of sales. ASU 606 defines a performance obligation as a promise to provide a good or service to a customer.
The promise may be accepted explicitly, implicitly or on the basis of normal business practices. Performance obligations must be either a single good/service or a set of different goods/services that are essentially the same and have the same model of transfer to the customer. Determining a standalone selling price can be simple if the company regularly sells the product or service on a stand-alone basis. However, if a company does not itself sell a particular performance obligation, it must estimate the stand-alone selling price using one of three methods, as shown in the graph below. These methods are described in detail on page 23 of our Revenue Recognition Guide. When considering the impact of the new standards on revenues and leases, management may find that users of the financial statements would be harmed by the required updates or that the cost of implementing the changes far outweighs the benefits. If so, companies should take a closer look at the FRF for SME executives as an alternative to reporting. I. the nature of our professional services is generally tailored to the specific wishes and needs of our clients, and II. These services are not transferable to other customers (i.e. they bring added value to the business.
We`ve published this accounting topic page to help you learn more about revenue recognition, including accounting issues and DIFFERENCES under GAAP. We also provide useful links to our blog posts and eLearning courses on the subject, as well as external expert advice published by Big 4 accounting firms. It`s a hodgepodge of ASC 606 and IFRS 15 knowledge in one convenient place! When control is transferred over time, an entity seizes revenues during the period in which it fulfills the related performance obligation using a method (i.e., the inflow or outbound method) that best represents progress in meeting the performance obligation. Think about the percentage of completion method used by construction companies. Whichever method they choose, companies should systematically apply the method to similar performance obligations and similar transactions or agreements. Below is an overview of the most common types of contracts used by professional services firms and how the new guidelines can account for related revenues. In many cases, determining whether the proportional performance method or the completed performance method should be used to account for a service contract requires significant judgment. Contact us Send us an email directly to RevRec1@deloitte.com if you have any questions or to request a meeting with one of our revenue accounting specialists. Changes to existing specifications will be evaluated as contract amendments, including changes in the nature of professional service and the purchase of professional services overtime. Step 2 of the revenue recognition model requires the company to identify performance obligations and determine whether promises to transfer goods or services are different performance obligations. This section explains the requirements and draws conclusions for our general performance obligations in our contracts with customers.
Each contract must go through this evaluation. The SEC continues to focus on non-GAAP measures, including adjustments that change the accounting policy or method of recognizing an accounting measure that may be misleading and therefore ineligible. For example, a non-GAAP performance measure that reflects revenue recognized under GAAP during the service period on an expedited basis, as if the licensee had generated revenue by charging its customers, is likely to be prohibited because it is a custom accounting principle and does not reflect the GAAP accounting method required by the licensee […].
