Michelle Hatch | December 9, 2015
As noted in our prior blog post, new revenue recognition standards were issued in 2014. The fifth and final step of the new revenue recognition standard is to recognize revenue when (or as) the entity satisfies a performance obligation. An organization satisfies a performance obligation by transferring control of a promised good or service to the customer. The transfer can occur over time or at a point in time. A performance obligation is satisfied at a point in time unless it meets one of the following criteria, in which case it is satisfied over time:
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
- The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
- The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
Assessing whether each criterion is met will likely require significant judgment.
Read other articles in our “Revenue Recognition” Series:
- Five Steps for Recognizing Revenue under New FASB and IASB
- Revenue Recognition Step 1: Identify the Contract(s) with a Customer
- Revenue Recognition Step 2: Identify the Performance Obligation in the Contract
- Revenue Recognition Step 3: Determine the Transaction Price
- Revenue Recognition Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract
