Question

What are the five key steps to applying the revenue recognition principle? 2. What are indicators that control has passed from the seller to the buyer, such that it is appropriate to recognize revenue at a point in time? 3. Under what circumstances can sellers recognize revenue over time?

Answer 1

Answer:

The Five Steps to applying the revenue recognition principle

1. Identify the contract with a customer.

2. Identify the performance obligation(s) in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognize revenue when (or as) each performance obligation is satisfied.

Indicators that Control has Passed from the Seller to the Buyer

A performance obligation is satisfied at a single point in time when control is transferred to the buyer at a single point in time. This often occurs at delivery. Five key indicators are used to decide whether control of a good or service has passed from the seller to the buyer. The customer is more likely to control a good or service if the customer has:

1. An obligation to pay the seller.

2. Legal title to the asset.

3. Physical possession of the asset.

4. Assumed the risks and rewards of ownership.

5. Accepted the asset.

Under what circumstances can sellers recognize revenue over time

if at least one of the following three criteria is met:

1. The customer consumes the benefit of the seller's work as it is performed,

2. The customer controls the asset as it is created, or

3. The seller is creating an asset that has no alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract.