It also makes changes to the disclosure requirements for companies—what type of information they provide investors. The ASC could mean big changes for the way your business recognizes revenue, especially if you operate on a subscription model. It went into effect for publicly-traded companies in , and went into effect for everyone else in January of For example, if your subscription wine delivery service also offers online wine tasting lessons and customer support, make sure to not miss those when recognizing revenue.
Remember things like discounts, refunds, credits, bonuses, incentives, etc. One industry that will be drastically affected by ASC is the software as a service industry SaaS , mainly because of how inconsistent and unclear SaaS accounting used to be before the changes. SaaS services often bundle lots of different services into one plan, and when exactly the services have been delivered to the customer can sometimes be unclear. If you run a business that collects payments from customers up-front and your investors or lenders want your financial records to be in line with GAAP, it pays to read up on ASC If you run a very small business with no lenders or investors, you might not have to worry about any of this.
Read over steps of ASC above and make sure you understand how they affect the way you recognize revenue. We're an online bookkeeping service powered by real humans.
Bench gives you a dedicated bookkeeper supported by a team of knowledgeable small business experts. Your bookkeeping team imports bank statements, categorizes transactions, and prepares financial statements every month. Get started with a free month of bookkeeping. In the event a project stipulates performance measures, revenue is considered earned when the performance measures are completed. Deferred revenue — Deferred revenue results when cash is received in advance of revenue being earned.
Deferred revenue is recorded as a liability until it is earned. Once earned, the liability is reduced and revenue is recorded in the general ledger. When recording cash receipts, it is important to determine whether the cash represents earned revenue or deferred revenue.
Percentage of completion — Many projects funded by grants and contracts are long-term, meaning that the projects will continue for one year or more. For long-term contracts, GAAP allows the revenue to be recognized on a percentage-of-completion basis if "circumstances are such that total profit can be estimated with reasonable accuracy and ultimate realization is reasonably assured.
Sponsored Project Award Types. The majority of sponsored projects at Stanford fall under this category, and they may be government funded or privately funded. An example of this type of project is a clinical trial where funding is based on the number of patients participating in the trial and is received incrementally. Fixed price contracts — This type of contract sets a fixed price for the delivery of the work stipulated in the contract, regardless of actual expenses incurred by Stanford on the contract.
Stanford bears a financial risk where expenses exceed the fixed price. These types of sponsored projects are rare for Stanford and may be government funded or privately funded. There are many variations of cost reimbursement contracts. Many include stipulations regarding unallowable costs or limits on certain types of costs.
Procedures should be in place to ensure that only allowable costs are charged to the award. Refer to the original award document for specific information. Revenue recognition: Revenue is directly related to the costs incurred on cost-reimbursement contracts. Revenue is recognized as expenses are incurred. Expenditure adjustments may create an adjustment to revenue. Deferred revenue: While cost reimbursement, by definition, implies that payments are made after costs are incurred, this is not always the case.
Once the advance payment or excess payment is earned, the liability is reduced and revenue is recorded. Registrants should ensure that they have appropriate internal controls and adequate books and records that will result in timely identification of necessary changes in estimates that should be reflected in the financial statements and notes thereto.
Facts : FASB ASC paragraph lists a number of factors that may impair the ability to make a reasonable estimate of product returns in sales transactions when a right of return exists. The staff reminds registrants that if a transaction fails to meet all of the conditions of FASB ASC paragraphs and , no revenue may be recognized until those conditions are subsequently met or the return privilege has substantially expired, whichever occurs first.
If management cannot develop an estimate that is sufficiently reliable for use by investors, the staff believes it cannot make a reasonable estimate meeting the requirements of that standard. Question : Does the staff expect registrants to apply the guidance in Question 1 of Topic The views set forth in Question 1 of Topic Question : Question 1 of Topic How long a history does the staff believe is necessary to estimate returns in a product sale transaction that is within the scope of FASB ASC Subtopic ?
Interpretive Response : The staff does not believe there is any specific length of time necessary in a product transaction. Preparers and auditors should be skeptical of estimates of product returns when little history with a particular product line exists, when there is inadequate verifiable evidence of historical experience, or when there are inadequate internal controls that ensure the reliability and timeliness of the reporting of the appropriate historical information. Start-up companies and companies selling new or significantly modified products are frequently unable to develop the requisite historical data on which to base estimates of returns.
Question : If a company selling products subject to a right of return concludes that it cannot reasonably estimate the actual return rate due to its limited history, but it can conservatively estimate the maximum possible returns, does the staff believe that the company may recognize revenue for the portion of the sales that exceeds the maximum estimated return rate?
If a reasonable estimate of future returns cannot be made, FASB ASC Subtopic requires that revenue not be recognized until the return period lapses or a reasonable estimate can be made. Facts : Company A owns and leases retail space to retailers.
Company A lessor renews a lease with a customer lessee that is classified as an operating lease. If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.
However, such factors may affect the periodic reported rental income or expense if the lease agreement involves contingent rentals, which are excluded from minimum lease payments and accounted for separately. FASB ASC paragraph indicates that contingent rental income in operating leases should not be recognized in a manner consistent with scheduled rent increases i. The staff believes that the reasoning in FASB ASC Section supports the conclusion that the risks inherent in variable payments associated with contingent rentals should be reflected in financial statements on a basis different than rental payments that adjust on a scheduled basis and, therefore, operating lease income associated with contingent rents would not be recognized as time passes or as the leased property is physically employed.
Consequently, the staff believes that it is inappropriate to anticipate changes in the factors on which contingent rental income in operating leases is based and recognize rental income prior to the resolution of the lease contingencies. The staff does not believe that it is appropriate to recognize revenue based upon the probability of a factor being achieved. The contingent revenue should be recorded in the period in which the contingency is resolved. Facts : Company M performs claims processing and medical billing services for healthcare providers.
In this role, Company M is responsible for preparing and submitting claims to third-party payers, tracking outstanding billings, and collecting amounts billed.
If no collections are made, no fee is due to Company M. Company M has historical evidence indicating that the third-party payers pay 85 percent of the billings submitted with no further effort by Company M. Company M has determined that the services performed under the arrangement are a single unit of accounting. Question : May Company M recognize as revenue its five percent fee on 85 percent of the gross billings at the time it prepares and submits billings, or should it wait until collections occur to recognize any revenue?
Interpretive Response : The staff believes that Company M must wait until collections occur before recognizing revenue. That is, its revenue is not yet realized or realizable. If a company has different policies for different types of revenue transactions, including barter sales, the policy for each material type of transaction should be disclosed.
If sales transactions have multiple units of accounting, such as a product and service, the accounting policy should clearly state the accounting policy for each unit of accounting as well as how units of accounting are determined and valued.
In addition, the staff believes that changes in estimated returns recognized in accordance with FASB ASC Subtopic should be disclosed, if material e. Regulation S-X requires that revenue from the sales of products, services, and other products each be separately disclosed on the face of the income statement. Changes in revenue should not be evaluated solely in terms of volume and price changes, but should also include an analysis of the reasons and factors contributing to the increase or decrease.
ASC Topic provides a single set of revenue recognition principles governing all contracts with customers and supersedes the revenue recognition framework in ASC Topic , which eliminates the need for Topic Prior to adoption of ASC Topic , registrants should continue to refer to prior Commission and staff guidance on revenue recognition topics.
The citations provided herein are not intended to present the complete population of citations where a particular criterion is relevant. Rather, the citations are intended to provide the reader with additional reference material. Revenue should not be recognized until the seller has substantially accomplished what it must do pursuant to the terms of the arrangement, which usually occurs upon delivery or performance of the services.
A fixed fee includes amounts designated as minimum royalties. The staff believes that the guidance in FASB ASC paragraphs through and through is appropriate for other sales transactions where authoritative guidance does not otherwise exist.
The staff notes that FASB ASC paragraphs through specifically consider software transactions, however, the staff believes that guidance should be considered in other sales transactions in which the risk of technological obsolescence is high. The arrangement may not specify that payment is contingent upon subsequent resale or consumption.
This paragraph provides examples of circumstances that meet this requirement. As discussed further therein, this condition is present if a a resale price guarantee exists, b the seller has an option to purchase the product, the economic effect of which compels the seller to purchase the product, or c the buyer has an option whereby it can require the seller to purchase the product.
Bollinger Industries, Inc. See also Concepts Statement 5, paragraph 84 a. The staff disagrees with that argument. In general, the staff typically expects a start-up company, a company introducing new services, or a company introducing services to a new class of customer to have at least two years of experience to be able to make reasonable and reliable estimates.
Even though the revenue discussed in this example is refundable, if a registrant meets the aforementioned criteria for revenue recognition over the membership period, the staff would analogize to this guidance. However, if neither a nonrefundable contract nor a reliable basis for estimating net cash inflows under refundable contracts exists to provide a basis for recovery of incremental direct costs, the staff believes that such costs should be expensed as incurred.
See SAB Topic Question 3. Any material item should be stated separately. Home Previous Page. Codification of Staff Accounting Bulletins Topic Revenue Recognition Selected Revenue Recognition Issues Revenue recognition - general Persuasive evidence of an arrangement Delivery and performance Bill and hold arrangements Customer acceptance Inconsequential or perfunctory performance obligations License fee revenue Layaway sales arrangements Nonrefundable up-front fees Deliverables within an arrangement Fixed or determinable sales price Refundable fees for services Estimates and changes in estimates Contingent rental income Claims processing and billing services Disclosures FASB ASC Topic A.
Selected Revenue Recognition Issues 1. Revenue recognition — general The accounting literature on revenue recognition includes both broad conceptual discussions as well as certain industry-specific guidance. Persuasive evidence of an arrangement Question 1 Facts : Company A has product available to ship to customers prior to the end of its current fiscal quarter.
The staff believes that the presence of one or more of the following characteristics in a transaction precludes revenue recognition even if title to the product has passed to the buyer: 1. The buyer has the right to return the product and: a the buyer does not pay the seller at the time of sale, and the buyer is not obligated to pay the seller at a specified date or dates. Delivery and performance a. Bill and hold arrangements Facts : Company A receives purchase orders for products it manufactures.
Customer acceptance After delivery of a product or performance of a service, if uncertainty exists about customer acceptance, revenue should not be recognized until acceptance occurs.
Question 1 Question : Do circumstances exist in which formal customer sign-off that a contractual customer acceptance provision is met is unnecessary to meet the requirements to recognize revenue? Interpretive Response : Yes. Those forms, and how the staff generally assesses whether customer acceptance provisions should result in revenue deferral, are described below: a Acceptance provisions in arrangements that purport to be for trial or evaluation purposes.
The staff evaluates these provisions as follows: b Acceptance provisions that grant a right of return or exchange on the basis of subjective matters. Question 3 Facts : Company E is an equipment manufacturer whose main product is generally sold in a standard model.
Inconsequential or perfunctory performance obligations Question 1 Question : Does the failure to complete all activities related to a unit of accounting preclude recognition of revenue for that unit of accounting? Question 2 Question : What factors should be considered in the evaluation of whether a remaining obligation related to a unit of accounting is inconsequential or perfunctory?
For example, the staff also considers the following factors, which are not all-inclusive, to be indicators that a remaining performance obligation is substantive rather than inconsequential or perfunctory: The seller does not have a demonstrated history of completing the remaining tasks in a timely manner and reliably estimating their costs.
The cost or time to perform the remaining obligations for similar contracts historically has varied significantly from one instance to another. The skills or equipment required to complete the remaining activity are specialized or are not readily available in the marketplace. The cost of completing the obligation, or the fair value of that obligation, is more than insignificant in relation to such items as the contract fee, gross profit, and operating income allocable to the unit of accounting.
The period before the remaining obligation will be extinguished is lengthy. Registrants should consider whether reasonably possible variations in the period to complete performance affect the certainty that the remaining obligations will be completed successfully and on budget. The timing of payment of a portion of the sales price is coincident with completing performance of the remaining activity. Question 3 Facts : Consider a unit of accounting that includes both equipment and installation because the two deliverables do not meet the separation criteria under FASB ASC Subtopic Question : Should the license fee be recognized in the period ending December 31?
Nonrefundable up-front fees Question 1 Facts : Registrants may negotiate arrangements pursuant to which they may receive nonrefundable fees upon entering into arrangements or on certain specified dates. Examples of this type of arrangement include the following: A registrant sells a lifetime membership in a health club.
The monthly usage fees collected from all customers are adequate to cover the operating costs of the health club. A registrant in the biotechnology industry agrees to provide research and development activities for a customer for a specified term. The customer needs to use certain technology owned by the registrant for use in the research and development activities.
The technology is not sold or licensed separately without the research and development activities. The costs incurred to activate the telecommunications service are nominal.
A registrant charges users a fee for non-exclusive access to its web site that contains proprietary databases. The fee allows access to the web site for a one-year period. After the customer is provided with an identification number and trained in the use of the database, there are no incremental costs that will be incurred in serving this customer. A registrant charges a fee to users for advertising a product for sale or auction on certain pages of its web site. The company agrees to maintain the listing for a period of time.
The cost of maintaining the advertisement on the web site for the stated period is minimal. Question 3 Facts : Assume the same facts as in Question 2 above. Question 4 Facts : Assume the same facts as in Question 2 above. Question 5 Facts : Assume the same facts as in Question 2 above. Question : Over what period should Company A amortize these costs? Deliverables within an arrangement Question : If a company the seller has a patent to its intellectual property which it licenses to customers, the seller may represent and warrant to its licensees that it has a valid patent, and will defend and maintain that patent.
Fixed or determinable sales price a. Pending further action in this area by the FASB, the staff will not object to the recognition of refundable membership fees, net of estimated refunds, as earned revenue over the membership term in the limited circumstances where all of the following criteria have been met: 51 The estimates of terminations or cancellations and refunded revenues are being made for a large pool of homogeneous items e.
Reliable estimates of the expected refunds can be made on a timely basis. In addition, the staff believes that an estimate, for purposes of meeting this criterion, would not be reliable unless it is remote 54 that material adjustments both individually and in the aggregate to previously recognized revenue would be required.
There is a sufficient company-specific historical basis upon which to estimate the refunds, 55 and the company believes that such historical experience is predictive of future events. In assessing these items, the staff believes that estimates of future refunds should take into consideration, among other things, such factors as historical experience by service type and class of customer, changing trends in historical experience and the basis thereof e.
Question 2 Question : Will the staff accept an analogy to FASB ASC Subtopic for service transactions subject to customer cancellation privileges other than those specifically addressed in the previous question? A talent agent whose fee receivable from its principal i. An insurance agent whose commission received from the insurer upon selling an insurance policy is refundable in whole for the day period that state law permits the consumer to repudiate the contract and then refundable on a declining pro rata basis until the consumer has made six monthly payments.
Question 6 Question : When a registrant first determines that reliable estimates of cancellations of service contracts can be made e. Estimates and changes in estimates Accounting for revenues and costs of revenues requires estimates in many cases; those estimates sometimes change.
Question 1 Facts : FASB ASC paragraph lists a number of factors that may impair the ability to make a reasonable estimate of product returns in sales transactions when a right of return exists. Question 3 Question : Does the staff expect registrants to apply the guidance in Question 1 of Topic Question 4 Question : Question 1 of Topic Question 5 Question : If a company selling products subject to a right of return concludes that it cannot reasonably estimate the actual return rate due to its limited history, but it can conservatively estimate the maximum possible returns, does the staff believe that the company may recognize revenue for the portion of the sales that exceeds the maximum estimated return rate?
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