Step 4 of 10 in Knowing Revenues

As we move forward, we have established that revenues are inflows of enhancements or settlements. They ensure the continual operation of a company. In terms of “when” to recognize we discussed the difficulties of the “Realization Principle”, which tells us earnings are processed when they are completed and reasonable certainty existed, but failed to connect with FASB’s conceptual framework, different industry treatments from companies, and difficulty to handle complex arrangements.

Therefore, FASB new revenue recognition standard is the “Revenue from Contracts with Customers”. This new standard, provided a truly “unified” approach that replaces hundreds of specialized guidance in US GAAP, across industries and situations. It is the Standard Update of “Revenues from Contracts with Customers” that sets up the Core Principle. The Core Principle recognizes revenue when a good/service is transferred to customers for the amount that is expected to be entitled, in exchange for the goods/service.

​Therefore, in short, the new “Revenue from Contracts with Customers” standard allows for the “Core Principle” to determine “when” the transfer to customers is set to occur and “how much” is entitled. Revenue is set to be recognized over a period of time if a customer will CONSUME the benefits from the transaction, CONTROL the asset, or asset has no ALTERNATIVE use and the seller has the legal right to receive payment. And if revenue cannot be recognized over a period of time, it is then to be at a point in time, where the performance obligation is set to be completely satisfied. This will most likely happen towards the end of the contract (in the single point in time case). That is step 4.