Revenue Recognition Methods: Five Steps (2024)

') $(accordionID + '-controls .daccord-expandcollapse li').eq(1).hide(); $(accordionID + '-controls .daccord-expandcollapse li').on('click',function () { if ( $(this).index() == 0) { //expand $(accordionID + '-controls .daccord-expandcollapse li').eq(0).hide(); $(accordionID + '-controls .daccord-expandcollapse li').eq(1).show(); $(accordionID + ' .daccord-collapse').slideDown(daccordSpeed); $(accordionID +' .daccord-header').addClass('daccord-header-icon'); } if ( $(this).index() == 1) { //collapse $(accordionID + '-controls .daccord-expandcollapse li').eq(1).hide(); $(accordionID + '-controls .daccord-expandcollapse li').eq(0).show(); $(accordionID + ' .daccord-collapse').slideUp(daccordSpeed); $(accordionID +' .daccord-header').removeClass('daccord-header-icon'); } }); } //if a valid var from url exists override open item setting. var daccordUrlVar = $.getUrlVar('accordion'); if ($.fn.daccordIsInt(daccordUrlVar)) { var urlInt = parseInt(daccordUrlVar); daccordUrlVar = urlInt; properties.openItem = daccordUrlVar; } //Build item object from AEM Vars var daccordItems = []; //Item 1 daccordItems[0] = { itemTitle: "Identifying performance obligations ", itemText: "

A performance obligation is the unit of account for which revenue is recognized. A performance obligation is a promise that an entity makes to transfer to its customer a distinct good or service. Contracts with customers often include multiple promises, and it can be difficult for an entity to (1) identify the activities it is undertaking that qualify as promises to provide goods or services, and (2) determine which promises are distinct. An entity should answer two questions to evaluate whether a promised good or service is distinct and, thus, a separate performance obligation:

• Can the customer benefit from the good or service on its own or with other readily available resources (i.e., is the good or service capable of being distinct)?
• Is the entity’s promise to transfer the good or service separately identifiable from other promises in the contract (i.e., is the good or service distinct within the context of the contract)?

Only when the answer to each question above is yes for a promised good or service (or bundle of goods or services) is the promised good or service (or bundle of goods or services) distinct and, therefore, a performance obligation. If the two revenue recognition criteria for identifying a distinct good or service are not met, an entity must combine goods or services until it identifies a bundle that is distinct.

Answering the first question can be straightforward but is not always so. If an entity typically sells a good or service on its own, or if the good or service can be used with another good or service that the entity (or another vendor) sells separately, the answer to the first question is likely to be yes. The key is whether a customer can generate some economic benefits from the good or service on its own or with other readily available resources.

Answering the second question is often more challenging. For an entity to assess whether its promise to transfer a good or service is separately identifiable from other goods or services in a contract, the entity should evaluate whether the nature of the promise is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs.

The revenue standard includes indicators of when two or more promised goods or services are not separately identifiable, including situations in which:

1. An entity provides a significant service of integrating goods and services into a combined output or outputs (e.g., constructing a building).
2. One or more goods or services significantly modify or customize one or more other goods or services (e.g., customizing specialized equipment).
3. The goods and services are highly interdependent or interrelated in such a way that they significantly affect one another (e.g., providing software with critical updates).

Broadly speaking, if multiple promised goods or services represent inputs to a combined output, the combined output would typically be greater than (or substantively different from) the sum of those inputs.

", itemImage: "${item-1-image}", itemImageRight: "${item-1-image-right}", itemMoreText: "${item-1-read-more-text}", itemMoreURL: "${item-1-read-more-url}", itemVideoURL: "${item-1-video-url}", itemInfographicUrl: "${item-1-infographic-url}" }; //Item 2 daccordItems[1] = { itemOpen: "${item-2-open}", itemTitle: "Assessing whether an entity is a principal or an agent", itemText: "

It is not uncommon for more than one party to be involved in providing goods or services to a customer. Whenever another party is involved, an entity must evaluate whether its promise is to provide the goods or services itself as a principal or to arrange for another party to provide the goods or services to a customer. Such a determination significantly affects the amount of revenue an entity records. This is because a principal records as revenue the gross amount of consideration from the customer (with a corresponding cost for the amount paid to the other party involved in providing goods or services to the customer) while an agent records the net amount retained from the transaction.

The unit of account for performing the principal-versus-agent assessment is called the specified good or service, which is the good or service that an entity determines to be distinct by using the same criteria that apply to the identification of performance obligations. The underlying principle in determining whether an entity is a principal or an agent is to evaluate whether the entity controls the specified good or service before transferring it to the customer. Control is defined as the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset. Determining whether the entity controls the specified good or service before transferring it to the customer—and, therefore, is the principal in the arrangement—may be clear in some circ*mstances but may require significant judgment in others.

There are three key indicators to help the entity make this assessment:

• The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
• The entity has inventory risk before the specified good or service has been transferred to the customer or after transfer of control to the customer (e.g., if the customer has a right of return).
• The entity has discretion in establishing the price for the specified good or service. However, an agent can have discretion in establishing prices in some cases.

These indicators are intended to support a conclusion that the entity does or does not control the specified good or service before transferring it to the customer and should not be used as a checklist that overrides the underlying principle of control.

The framework for evaluating whether an entity is a principal or an agent is also relevant to the determination of the party to which control of a specified good or service is transferred (i.e., which party is the entity’s customer). This evaluation is particularly relevant when an intermediary (e.g., a distributor or reseller) is involved in reselling the entity’s goods or services to an end customer. If an entity determines that control of a specified good or service is transferred to an intermediary, the intermediary is the entity’s customer, and the entity records revenue based on the amount that it expects the intermediary to pay. However, if the entity concludes that the intermediary does not obtain control of the specified good or service before the good or service is transferred to the end customer, the amount of revenue that the entity records is based on the consideration (if known) that the entity expects the end customer to pay.

", itemImage: "${item-2-image}", itemImageRight: "${item-2-image-right}", itemMoreText: "${item-2-read-more-text}", itemMoreURL: "${item-2-read-more-url}", itemVideoURL: "${item-2-video-url}", itemInfographicUrl: "${item-2-infographic-url}" } //Item 3 daccordItems[2] = { itemOpen: "${item-3-open}", itemTitle: "Variable consideration", itemText: "

Many revenue contracts include variable consideration, including price concessions, rebates, incentives, royalties, and performance-based bonuses or penalties. Generally, the revenue standard requires an entity to estimate variable consideration, with recognition subject to a constraint such that it is probable that a significant reversal of cumulative revenue recognized will not occur. Many entities have had to implement significant changes to their internal controls to develop processes for estimating and constraining variable consideration. There are a few exceptions to the requirement to estimate variable consideration, including sales- or usage-based royalties associated with a license of intellectual property (IP) that is the predominant item. In addition, entities must carefully evaluate whether variable consideration should be allocated to one or more, but not all, performance obligations in a contract (or one or more, but not all, distinct goods or services that are part of a series of distinct goods or services that represent a single performance obligation). For example, some usage-based fees may be allocated to a distinct day of service that is part of a series of services.

", itemImage: "${item-3-image}", itemImageRight: "${item-3-image-right}", itemMoreText: "${item-3-read-more-text}", itemMoreURL: "${item-3-read-more-url}", itemVideoURL: "${item-3-video-url}", itemInfographicUrl: "${item-3-infographic-url}" }; //Item 4 daccordItems[3] = { itemOpen: "${item-4-open}", itemTitle: "Licensing", itemText: "

The revenue standard includes specific guidance on the licensing of an entity’s IP. For example, revenue associated with the license of functional IP (e.g., software, film, music, drug compound/formula) is typically recognized at a point in time (unless combined as a single performance obligation with a service that is recognized over time) while revenue associated with a license of symbolic IP (e.g., franchise, trade or brand name, logo) is typically recognized over time. However, the general framework used to account for licensing of IP is essentially the same as the framework used to account for the sale of other goods or services (i.e., the five-step model described above). As noted above, one exception to the general framework is the accounting for sales- or usage-based royalties associated with licensing of IP that is the predominant item.

Licensing of IP can take many forms, and the economics and substance of such transactions can often be difficult to identify. This is because (1) a license is defined by the contractual rights conveyed to a customer, and (2) the accounting for such rights is highly dependent on how those rights are defined and what, if any, additional promised goods or services are required to be provided along with such rights. Therefore, an entity may find that no two contracts are the same and that new judgments must be made with each arrangement. As more and more entities expand their product offerings to include technology-related products or services, assessing the appropriate revenue recognition for licensing of IP continues to be a topic of focus for many entities.

", itemImage: "${item-4-image}", itemImageRight: "${item-4-image-right}", itemMoreText: "${item-4-read-more-text}", itemMoreURL: "${item-4-read-more-url}", itemVideoURL: "${item-4-video-url}", itemInfographicUrl: "${item-4-infographic-url}" }; //Item 5 daccordItems[4] = { itemOpen: "${item-5-open}", itemTitle: "${item-5-title}", itemText: "${item-5-text}", itemImage: "${item-5-image}", itemImageRight: "${item-5-image-right}", itemMoreText: "${item-5-read-more-text}", itemMoreURL: "${item-5-read-more-url}", itemVideoURL: "${item-5-video-url}", itemInfographicUrl: "${item-5-infographic-url}" }; //Item 6 daccordItems[5] = { itemOpen: "${item-6-open}", itemTitle: "${item-6-title}", itemText: "${item-6-text}", itemImage: "${item-6-image}", itemImageRight: "${item-6-image-right}", itemMoreText: "${item-6-read-more-text}", itemMoreURL: "${item-6-read-more-url}", itemVideoURL: "${item-6-video-url}", itemInfographicUrl: "${item-6-infographic-url}" }; //Item 7 daccordItems[6] = { itemOpen: "${item-7-open}", itemTitle: "${item-7-title}", itemText: "${item-7-text}", itemImage: "${item-7-image}", itemImageRight: "${item-7-image-right}", itemMoreText: "${item-7-read-more-text}", itemMoreURL: "${item-7-read-more-url}", itemVideoURL: "${item-7-video-url}", itemInfographicUrl: "${item-7-infographic-url}" }; //Item 8 daccordItems[7] = { itemOpen: "${item-8-open}", itemTitle: "${item-8-title}", itemText: "${item-8-text}", itemImage: "${item-8-image}", itemImageRight: "${item-8-image-right}", itemMoreText: "${item-8-read-more-text}", itemMoreURL: "${item-8-read-more-url}", itemVideoURL: "${item-8-video-url}", itemInfographicUrl: "${item-8-infographic-url}" }; //Item 9 daccordItems[8] = { itemOpen: "${item-9-open}", itemTitle: "${item-9-title}", itemText: "${item-9-text}", itemImage: "${item-9-image}", itemImageRight: "${item-9-image-right}", itemMoreText: "${item-9-read-more-text}", itemMoreURL: "${item-9-read-more-url}", itemVideoURL: "${item-9-video-url}", itemInfographicUrl: "${item-9-infographic-url}" }; //Item 10 daccordItems[9] = { itemOpen: "${item-10-open}", itemTitle: "${item-10-title}", itemText: "${item-10-text}", itemImage: "${item-10-image}", itemImageRight: "${item-10-image-right}", itemMoreText: "${item-10-read-more-text}", itemMoreURL: "${item-10-read-more-url}", itemVideoURL: "${item-10-video-url}", itemInfographicUrl: "${item-10-infographic-url}" }; daccordItems = $.fn.daccordScrubData(daccordItems,properties); //render html within fragID for (i = 0; i < properties.numberOfItems; i++) { //add html var html = dcomAccordionItemTemplate(daccordItems[i]); $(accordionID).append(html); //add youtube vids if present if (daccordItems[i].itemVideoURL) { //check if one trust group 4 is enabled || if one trust isnt active display anyway if ((typeof OnetrustActiveGroups === 'undefined') || (OnetrustActiveGroups.indexOf(",4,") >= 0)) { $(accordionID + ' #' + properties.fragId + 'collapse' + daccordItems[i].itemNum + 'vid').player({ video: daccordItems[i].itemVideoURL, playerVars: { controls: 2, modestbranding: 0, rel: 0, color: 'white', showinfo: 0, theme: 'dark', autoplay: 0 }, events: { end: daccordVidEnd, play: daccordVidStart, pause: daccordVidStop } }); //show container ({{fragId}}collapse{{itemNum}}vid-cont) $(accordionID + ' #' + properties.fragId + 'collapse' + daccordItems[i].itemNum + 'vid-cont').show(); //hide fallback ({{fragId}}collapse{{itemNum}}vid-fallback) $(accordionID + ' #' + properties.fragId + 'collapse' + daccordItems[i].itemNum + 'vid-fallback').hide(); } } } //set open states if (properties.openItem > -1) { daccordSelected = (properties.openItem - 1); //set item index (minus 1) $(accordionID +' .daccord-collapse').eq(daccordSelected).slideToggle( daccordSpeed ); if (!properties.expandCollapseAll) { $(accordionID +' .daccord-header').eq(daccordSelected).toggleClass('daccord-header-open'); } else { $(accordionID +' .daccord-header').eq(daccordSelected).toggleClass('daccord-header-icon'); } } //set css options within fragID var css = accordionID + ' .daccord-header a {background-color: ' + properties.titlebarBackgroundColor + ' }'; css += accordionID + ' .daccord-header a {color: ' + properties.titlebarFontColor + ' }'; css += accordionID + ' .daccord-header-icon a { background-color: ' + properties.titlebarActiveBackgroundColor + ' }'; css += accordionID + ' .daccord-header-open a { background-color: ' + properties.titlebarActiveBackgroundColor + ' }'; css += accordionID + ' .daccord-header .daccord-header-bar-icon:after { color: ' + properties.titlebarBackgroundColor + ' }'; css += accordionID + ' .daccord-header-icon .daccord-header-bar-icon:after { color: ' + properties.titlebarActiveBackgroundColor + ' }'; css += accordionID + ' .daccord-header-open .daccord-header-bar-icon:after { color: ' + properties.titlebarActiveBackgroundColor + ' }'; $('head').append('

'); //set click events //accordions $(accordionID + ' .daccord-header').on('click',function() { var index = $(this).parent().prevAll().length; //stop (pause) all vids var daccordVidPlayers = $(accordionID + ' iframe.daccord-video'); $.each(daccordVidPlayers, function () { var daccordStopVid = YT.get($(this).attr('id')); daccordStopVid.pauseVideo(); }); if (!properties.expandCollapseAll) { //close open if (daccordSelected > -1) { $(accordionID + ' .daccord-collapse').eq(daccordSelected).slideUp(daccordSpeed); $(accordionID +' .daccord-header').eq(daccordSelected).removeClass('daccord-header-open'); $(accordionID +' .daccord-header').eq(daccordSelected).removeClass('daccord-header-icon'); } if (daccordSelected != index ) { //open selection - add selected state; daccordSelected = index; $(accordionID +' .daccord-collapse').eq(daccordSelected).slideDown(daccordSpeed); $(accordionID +' .daccord-header').eq(daccordSelected).addClass('daccord-header-open'); $(accordionID +' .daccord-header').eq(daccordSelected).addClass('daccord-header-icon'); } else { daccordSelected = -1; } } else { //set selected if collapse all daccordSelected = index; $(accordionID +' .daccord-collapse').eq(index).slideToggle( daccordSpeed ); $(accordionID +' .daccord-header').eq(index).toggleClass('daccord-header-icon'); //check number of items open/closed and set ui //daccord-header-icon var daccordOpenItems = $(accordionID +' .daccord-header-icon').length; //expand if 0 if (daccordOpenItems == 0) { $(accordionID + '-controls .daccord-expandcollapse li').eq(0).show(); $(accordionID + '-controls .daccord-expandcollapse li').eq(1).hide(); } //collapse if all opens if (daccordOpenItems == properties.numberOfItems) { $(accordionID + '-controls .daccord-expandcollapse li').eq(1).show(); $(accordionID + '-controls .daccord-expandcollapse li').eq(0).hide(); } } }); //CTA analytics var elementClicked = false; $('#daccord-' + 'accordion' + " a.daccord-header-bar").click(function(e) { try { var FragType = "FRG-048"; var FragID = "accordion"; var ActionType = "click"; var ctaText = e.currentTarget.textContent.replace(/\s+/g, '-'); s.linkTrackVars = "prop1,prop2,prop3,prop4,prop5,eVar72"; s.eVar72 = PubID+FragType+":"+ActionType+":"+ctaText+":"+FragID; s.eVar72 = s.eVar72.toLowerCase(); s.prop1 = sc_country; s.prop2 = sc_language; s.prop3 = sc_country + ";" + sc_language; if(elementClicked != true) { s.linkTrackEvents = "event71,event72,event23"; s.events = "event71,event72,event23"; elementClicked = true; } else { s.linkTrackEvents = "event71,event23"; s.events = "event71,event23"; } s.tl(this, "o", s.eVar72); } catch(error) { console.error(error); console.log('analytics suite unavailable?'); } }); // hide html frag title/description var hideFragTitleDesc = "${hide-title-description}"; if (hideFragTitleDesc == "title") { $(accordionID).closest(".htmlfragment").find("h3.secondary-headline").remove(); } else if (hideFragTitleDesc == "description") { $(accordionID).closest(".htmlfragment").find("h3.secondary-headline").siblings("p").remove(); } else if (hideFragTitleDesc == "yes" || hideFragTitleDesc == "true" || hideFragTitleDesc == "both") { $(accordionID).closest(".htmlfragment").find("h3.secondary-headline").siblings("p").remove(); $(accordionID).closest(".htmlfragment").find("h3.secondary-headline").remove(); } // add top padding back for topic pages var templateType = dataLayer.page.attributes.pageTemplate; if (templateType == "Deloitte_Full_Topic_Page") { $(accordionID).closest(".standard-white-component").css("padding-top","20px"); } }; daccord(); });