Revenue Recognition Based on T’s & C’s
Today, there are numerous requirements for recognizing revenue. Under the proposed revenue recognition standard, all entities would recognize revenue in accordance with the framework set forth in the proposed revenue recognition standard regardless of industry and/or geography.
Today, many goods or services promised in a contract with a customer are deemed not to be revenue-generating transactions when in fact those promises might represent separate obligations of the entity to the customer. Under the proposed revenue recognition standard, entities would be required to identify each of the separate goods or services they promise to a customer in a contract and recognize revenue for those promises when or as each is satisfied.
Today, the consideration received from a customer generally is allocated entirely to one promised good or service in the contract. Under the proposed revenue recognition standard, entities would be required to allocate the total transaction price to each of the separate promises in the contract on the basis of the estimated price at which the entity could sell the promised good or service on a standalone basis to a similar customer.
Today, revenue is generally recognized only up to the amount an entity is reasonably assured will be collected and bad debt expense is presented as part of SG&A expenses. Under the proposed revenue recognition standard, entities would recognize revenue based on the amount to which they expect to be entitled and bad debt expense would be presented as a prominent expense in the statement of comprehensive income. The intent of this presentation is to give users greater clarity about the entity’s willingness to enter into contracts with customers that might not ultimately be converted into cash.
Today, the accounting for variable consideration differs greatly across industries. Under the proposed revenue recognition standard, the amount of revenue recognized in relation to promised variable consideration would be limited to the minimum amount of revenue that the entity concludes with a high degree of certainty that it would not subsequently have to reverse. The promised consideration would be considered variable, for example, when sales include a right of return or when the amount of the consideration is dependent on the performance of the entity.