5 points for revenue recognition
Step 1: Identify Contract with the Customer
An entity shall account for a contract with a customer, only
when all of the following criteria are met:
- contract must be approved by parties to contract, with defined commitment to perform their respective obligation.
- contract has clearly defined rights of parties as well as the payment terms
- contract is of commercial substance (transaction will have meaningful impact on the financial position, cash flows, or operations of a business)
- contract must have high probability of collecting the due consideration.
Step 2: Identify the Performance Obligations in the Contract
The performance obligation in a contract may be
- supply of distinct goods or service (or) bundle of it (or)
- supply of series of distinct goods or services, that are substantially the same and having the same pattern of transfer, to the customer.
Step 3: Determine the Transaction Price
Transaction price is the revenue/consideration to which entity is entitled, in exchange for transferring promised goods or services to customer.
- It excludes amounts collected on behalf of third parties (eg: GST).
- consideration promised in a transaction may includes both fixed or variable component or both
- Nature, timing and amount of consideration, has effect on the transaction price.
Step 4: Allocate the Transaction Price to the Performance Obligations
This steps involves allocating the transaction price of the contract, to each performance obligation, based on the expected consideration the entity is entitled to, from/for fulfilling the respective obligation.
Step 5: Recognize Revenue
when an entity transfers control of goods or service over time, revenue is recognised over
time, provided atleast one of the following conditions is met:
- Customer consumes benefits as and then the entity performs
- Customer controls the asset as it is being created or enhanced.
- Asset has no alternative use to the entity and the entity has the right to payment for work done.