Revenue Recognition Examples

The scenario states: “— A university has a world-marching band that recently a recording of marches by famous composers. The university enters into a contract with a vendor that wishes to use the recordings in advertisements. Significant terms of the contract include: the term is two years, the vendor receives a license to use the recordings in advertisements for that period, and the university receives a payment of $40,000 at the start of the two-year term.”

To recognize its revenue, they will

  • Step 1: Identify the contract(s) with the customer. A contract exists between the university and the vendor in which the vendor will pay $40,000 for a license to use the university’s intellectual property.
  • Step 2: Identify the performance obligations. Under the contract, the university is to provide the license for two years.
  • Step 3: Determine the transaction price. The transaction price is $40,000.
  • Step 4: Allocate the transaction price. The transaction price ($40,000) is to the intellectual property license, as there is only one performance Wuhan Mobile Phone Number obligation in the contract.
  • Step 5: Recognize revenue. The university recognizes the revenue ($40,000) at the start of the two-year contract because ASC 606 allows for this if the functionality of the property will not change throughout the contract.

Wuhan Mobile Phone Number

Example 2: Subscription Revenue

You own a quarterly subscription box company. Customers can sign up for an annual subscription where they prepay $199.99 for four boxes at $49.99 per box. As an alternative, customers can also pay quarterly at $54.99 per box. Consider a customer who signs up for an annual subscription.

To recognize revenue, you would:

  • Step 1: Identify the contract(s) with the customer. A contract exists between your company and its customer where the customer pays an annual sum of $199.99 to receive a quarterly subscription box from your business.
  • Step 2: Identify the performance obligations. Under the contract, your company has to provide a quarterly box to your customers.
  • Step 3: Determine the transaction price. The transaction price is $199.99.
  • Step 4: Allocate the transaction price. Allocation is not required as there is only one performance obligation.
  • Step 5: Recognize revenue. Revenue would be recognized over four quarters when your company provides the subscription box to the customer. Every quarter, your company would recognize $49.99.

Now, let’s look at the changes in the process if a customer signs up for a quarterly subscription.

  • Step 1: Identify the contract(s) with the customer. A contract exists between your company and its customer where the customer pays
ASC 606 Effective Date

ASC 606 Effective Date

The completed-contract method recognizes revenue and profits only after a completed contract. Companies typically use this method when they cannot predict how […]

Leave a comment

Your email address will not be published.