Step 5 of 10 in Knowing Revenues

We know that revenues are inflows of enhancements (assets) or settlements (liabilities); used for the continual operations of a company; in which in the past was accounted under the realization principle; in which it stated that revenue was recognized when something was “virtually completed” and showed “reasonable certainty” existed; in which showed to be inconsistent to FASB's framework, unable to handle complex arrangements, treated differently from many industries; in which, led to the rise of the new “Revenue from Contracts with Customers” standard, providing a unified approach under the “Core principle”. Next to note are the Five Steps in the Recognizing Revenue, being and using the “CPTTS”.

1. Identify the CONTRACT
2. Identify the PERFORMANCE OBLIGATION
3. Determine the TRANSACTION PRICE
4. Allocate the TRANSACTION PRICE
5. Recognize Revenue when Performance Obligations are SATISFIED

Revenue is set to 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. Recognizing revenue over time includes estimating progression towards completion, either it is “output based”, measured by the proportion of goods/service transferred or “input based”, measured by the proportion of effort expanded.

And if revenue cannot be recognized over a period, 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 5.