📊 Slides
Applying the Five-Step Revenue Recognition Model - Part 1

Identifying Contracts

The first step involves identifying the existence of a contract with a customer. This includes assessing the parties' rights and obligations, payment terms, and commercial substance.

  • Reviewing contractual terms
  • Assessing customer's ability to pay
  • Evaluating commercial substance
  • Determining contract modifications
  • Considering approval and commitment criteria
  • Assessing collectibility
Identifying contracts requires a thorough review of the agreement terms to ensure all necessary elements are present. Evaluating the customer's ability to pay and the commercial substance of the transaction are also key factors in this step.
Identifying contracts is crucial as it sets the foundation for revenue recognition.
Applying the Five-Step Revenue Recognition Model - Part 2

Performance Obligations

The second step focuses on identifying the distinct performance obligations within the contract. A performance obligation is a promise to transfer a good or service to the customer.

  • Determining distinct goods or services
  • Evaluating separability criteria
  • Assessing customization
  • Considering warranties or returns
  • Identifying installation or delivery services
  • Evaluating options for additional goods or services
Performance obligations must be identified clearly to determine when revenue should be recognized. Factors such as customization, warranties, and delivery services play a role in this assessment.
Recognizing performance obligations ensures that revenue is allocated appropriately.