WEBVTT NOTE Apply the revenue model 1 00:00:00.000 --> 00:00:12.003 You are listening to Reading 2-3 of the A C C 300 course reading: Apply the revenue model. The chapter takes the five steps of Topic 606 in order. 2 00:00:12.003 --> 00:00:25.156 Identify the contract, identify the performance obligations, determine the transaction price, allocate that price, and recognize revenue when control transfers. 3 00:00:25.156 --> 00:00:36.090 Then it shows how the order of performance, billing, and collection produces a receivable, a contract asset, or a contract liability. 4 00:00:36.090 --> 00:00:49.737 Sable Ridge Instruments applies all five steps to one Fairmont Health contract, and the chapter ends with a Northline Components contract for you to work on your own. 5 00:00:49.737 --> 00:01:03.384 The written chapter shows the contract exhibit, the diagrams, the tables, and three interactive Atlas checks, and it hides each Northline answer until you ask for it. 6 00:01:03.384 --> 00:01:09.066 A signed contract may state one price for several goods and services. 7 00:01:09.066 --> 00:01:23.310 Suppose a company signs the contract in November, receives an advance in December, performs consulting work from January through March, and sends its final invoice in April. 8 00:01:23.310 --> 00:01:37.473 The signature, cash receipt, work, and invoice occur on different dates. Revenue must follow the transfer of the promised service, not whichever date is easiest to observe. 9 00:01:37.473 --> 00:01:54.600 The company therefore must determine what it promised, how much consideration it expects, and when the customer obtains control of each promised good or service. Topic 606 organizes that work into five steps. 10 00:01:54.600 --> 00:02:08.862 The five-step revenue model. Each step uses work completed during earlier steps. Step 1, identify the contract. Which enforceable arrangement does the company account for? 11 00:02:08.862 --> 00:02:27.211 The result is the contract, or the combined contracts, to analyze. Step 2, identify the performance obligations. Which promises transfer distinct goods or services? The result is the units for allocation and recognition. 12 00:02:27.211 --> 00:02:43.391 Step 3, determine the transaction price. How much consideration does the company expect to be entitled to? The result is the amount available to allocate. Step 4, allocate the transaction price. 13 00:02:43.391 --> 00:03:01.323 How much of the transaction price belongs to each obligation? The result is an allocated amount for each obligation. Step 5, recognize revenue. When does the customer obtain control of each promised good or service? 14 00:03:01.323 --> 00:03:06.744 The result is revenue recognized at a point in time or over time. 15 00:03:06.744 --> 00:03:26.903 The five steps determine revenue. Billing and collection then determine whether the balance sheet reports a receivable, contract asset, contract liability, or some combination of those accounts. One model, many settings. 16 00:03:26.903 --> 00:03:42.572 These principles appear in many settings, including consulting projects, software implementations, subscriptions, engineering engagements, and many construction contracts. 17 00:03:42.572 --> 00:04:00.348 An industry label can signal that specialized guidance applies. When A S C Topic 606 governs the arrangement, the contract's promises and the way control transfers drive the revenue conclusions. 18 00:04:00.348 --> 00:04:12.077 Some arrangements are governed partly or entirely by other accounting guidance. Those specialized rules are outside this course. 19 00:04:12.077 --> 00:04:27.288 Here, the goal is to understand the core revenue decisions and apply them to a new customer contract. Students should also recognize when more guidance may be needed. 20 00:04:27.288 --> 00:04:30.589 Step 1: Identify the contract to account for. 21 00:04:30.589 --> 00:04:44.231 A company applies the revenue model to a contract with a customer only when all five of these conditions are satisfied: The parties approved the arrangement and are committed to perform. 22 00:04:44.231 --> 00:04:52.593 The company can identify each party's rights to the goods or services. The company can identify the payment terms. 23 00:04:52.593 --> 00:05:03.008 The arrangement has commercial substance, which means it is expected to change the risk, timing, or amount of the company's future cash flows. 24 00:05:03.008 --> 00:05:14.083 Collection of substantially all the consideration to which the company expects to be entitled for the goods or services that will transfer is probable. 25 00:05:14.083 --> 00:05:27.652 This assessment considers the customer's ability and intention to pay when payment is due. These conditions establish whether the company has a contract to which it can apply Topic 606. 26 00:05:27.652 --> 00:05:39.901 A signed document alone does not establish that conclusion. In United States generally accepted accounting principles, probable means that an event is likely to occur. 27 00:05:39.901 --> 00:05:51.343 A S C Topic 606 does not assign that term a fixed numerical percentage, so the conclusion depends on the available evidence rather than a mechanical cutoff. 28 00:05:51.343 --> 00:06:05.426 The amount the company expects to be entitled to may be less than the stated price when the company expects to grant a price concession. That commercial judgment is different from credit risk. 29 00:06:05.426 --> 00:06:21.416 A customer who cannot or does not intend to pay an amount the company still expects to be entitled to may fail the collectibility criterion; the company cannot treat that failure as a price concession merely to qualify 30 00:06:21.416 --> 00:06:23.616 the arrangement for Topic 606. 31 00:06:23.616 --> 00:06:40.827 Check your understanding. A customer signs an order, but the order does not identify the goods the company must deliver. Can the company apply the five-step revenue model to that order yet? Pause to consider your answer. 32 00:06:40.827 --> 00:06:55.065 Here is the explanation. No. The company cannot identify the parties' rights to the goods or services. One of the five contract conditions is not satisfied. Check your understanding. 33 00:06:55.065 --> 00:07:08.598 A company expects to accept 96,000 dollars as full payment on a stated 100,000 dollars price because it routinely grants this customer a 4,000 dollars commercial concession. 34 00:07:08.598 --> 00:07:24.010 The customer has the ability and intention to pay 96,000 dollars when due. Does the 4,000 dollars difference automatically cause the collectibility criterion to fail? Pause to consider your answer. 35 00:07:24.010 --> 00:07:37.778 Here is the explanation. No. The company evaluates probable collection of substantially all the 96,000 dollars it expects to be entitled to after the expected price concession. 36 00:07:37.778 --> 00:07:49.200 The answer would differ if the company still expected to be entitled to 100,000 dollars but doubted the customer's ability or intention to pay it. 37 00:07:49.200 --> 00:08:05.433 Cash received before Step 1 is satisfied. If the criteria are not met, the company stops before Step 2 and continues to reassess the arrangement. Cash received is generally a liability rather than revenue. 38 00:08:05.433 --> 00:08:19.608 For an equipment arrangement that has not qualified as a Topic 606 contract, Customer Deposit Liability describes why the company still owes the customer performance or repayment. 39 00:08:19.608 --> 00:08:26.232 The entry when Step 1 is not satisfied, recorded when cash is received. 40 00:08:26.232 --> 00:08:37.560 Debit Cash, 5,000 dollars, an asset. Credit Customer Deposit Liability, 5,000 dollars, a liability. 41 00:08:37.560 --> 00:08:51.248 The company keeps the liability until the arrangement later meets the Step 1 criteria or a limited revenue condition in A S C Topic 606, Subtopic 10, Section 25, paragraph 7 occurs. 42 00:08:51.248 --> 00:08:57.222 Those conditions include contract termination with nonrefundable consideration. 43 00:08:57.222 --> 00:09:08.868 They also include circumstances in which the company has no remaining obligations and has received all, or substantially all, nonrefundable consideration. 44 00:09:08.868 --> 00:09:21.497 If the arrangement later qualifies, the company begins applying A S C Topic 606. Any advance for goods or services the company still owes becomes a Contract Liability. 45 00:09:21.497 --> 00:09:36.092 That situation differs from a payment made in advance under a valid service contract. When the contract criteria are met but the service remains unperformed, the credit is a Contract Liability. 46 00:09:36.092 --> 00:09:49.704 A company's ledger may use a more specific title, such as Unearned Service Revenue or Deferred Subscription Revenue. The account remains a contract liability under A S C Topic 606. 47 00:09:49.704 --> 00:09:56.352 The entry for an advance under a valid contract, recorded when cash is received. 48 00:09:56.352 --> 00:10:08.448 Debit Cash, 12,000 dollars, an asset. Credit Contract Liability, 12,000 dollars, a liability. 49 00:10:08.448 --> 00:10:19.086 Check your understanding. A customer in severe financial difficulty pays a nonrefundable 5,000 dollars deposit on a 40,000 dollars machine. 50 00:10:19.086 --> 00:10:34.087 At inception, the seller concludes that collection of substantially all expected consideration is not probable. What does the seller report? Pause to consider your answer. Here is the explanation. 51 00:10:34.087 --> 00:10:46.638 Debit Cash and credit Customer Deposit Liability for 5,000 dollars. The seller reports no revenue because the arrangement has not qualified as a Topic 606 contract. 52 00:10:46.638 --> 00:11:03.322 Calling the deposit nonrefundable does not, by itself, show that the machine transferred or that the liability may be released. Credit deterioration after a valid contract exists raises a different accounting question. 53 00:11:03.322 --> 00:11:11.205 An existing receivable is evaluated under the credit-loss guidance rather than reduced through revenue. 54 00:11:11.205 --> 00:11:22.073 A significant change in the customer's ability to pay may also require the company to reassess the Step 1 criteria for the remaining contract. 55 00:11:22.073 --> 00:11:37.992 Chapter 14, Receivables, explains the allowance for credit losses under Topic 326. For now, distinguish an inception collectibility failure from a later change in the credit quality of an existing receivable. 56 00:11:37.992 --> 00:11:42.295 Decide whether separate agreements form one contract. 57 00:11:42.295 --> 00:11:59.996 Agreements entered into at or near the same time with the same customer or its related parties are combined when at least one of these conditions applies: the agreements were negotiated as a package with one commercial 58 00:11:59.996 --> 00:12:12.582 objective. the consideration in one agreement depends on the price or performance of the other. promises in the agreements form one performance obligation. 59 00:12:12.582 --> 00:12:27.360 Combining contracts changes the set of promises and consideration analyzed in the remaining steps. The fact that two agreements involve the same customer is not sufficient by itself. 60 00:12:27.360 --> 00:12:36.715 Step 2: Identify the performance obligations. Begin with an inventory of the goods and services promised to the customer. 61 00:12:36.715 --> 00:12:53.725 Include promises stated in the contract and promises created by the company's customary practices or published policies. Exclude administrative and setup activities that do not transfer a good or service to the customer. 62 00:12:53.725 --> 00:13:03.621 A performance obligation is a promise to transfer either: a distinct good or service, or a distinct bundle of goods or services. 63 00:13:03.621 --> 00:13:14.136 a qualifying series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. 64 00:13:14.136 --> 00:13:25.296 Apply both parts of the distinct test. A promised good or service is distinct only when the answer to both questions is yes. 65 00:13:25.296 --> 00:13:42.561 Is the promised good or service distinct? A decision tree with two questions. Question 1, capable of being distinct. Can the customer benefit from the good or service on its own or with a readily available resource? 66 00:13:42.561 --> 00:13:54.767 If no, combine the promise with other promises and apply both questions to the resulting bundle. If yes, go to Question 2, distinct within the contract. 67 00:13:54.767 --> 00:14:12.192 Is the promise separately identifiable from the other promises in the contract? If no, combine the promise with other promises and test the bundle. If yes, account for the promise as a separate performance obligation. 68 00:14:12.192 --> 00:14:25.300 How to answer each question. The next two explanations follow the decision tree in order. Use each one to answer the matching numbered question before moving to the next question. 69 00:14:25.300 --> 00:14:41.191 Question 1: Can the customer benefit from it? Answer yes when the customer can use, consume, sell, or otherwise benefit from the good or service either on its own or together with a resource that is readily available. 70 00:14:41.191 --> 00:14:48.001 A resource is readily available when the customer already has it or can obtain it separately. 71 00:14:48.001 --> 00:15:00.816 Answer no when the customer can benefit from the promised good or service only by receiving another promised good or service that is not yet readily available to the customer. 72 00:15:00.816 --> 00:15:15.569 Question 2: Is the promise separately identifiable in the contract? Consider whether the company: provides a significant service that integrates the item with other promises into one combined output. 73 00:15:15.569 --> 00:15:26.245 significantly modifies or customizes another promised item. provides items that are highly dependent on or highly interrelated with one another. 74 00:15:26.245 --> 00:15:35.883 Answer no when these factors show that the promise is an input to a combined output rather than a separately identifiable promise. 75 00:15:35.883 --> 00:15:47.893 Combine it with the specific promised goods or services in the contract to which it is not separately identifiable. Reapply both questions to that combined group. 76 00:15:47.893 --> 00:16:01.979 The company continues only until it identifies a group that satisfies both parts of the distinct test; it does not add unrelated promises merely to create a bundle. Check your understanding. 77 00:16:01.979 --> 00:16:18.215 A vendor delivers standard equipment and installs it. Other vendors can perform the installation, and the installation does not modify the equipment. Are delivery and installation necessarily one performance obligation? 78 00:16:18.215 --> 00:16:32.450 Pause to consider your answer. Here is the explanation. No. The customer can benefit from each promise, and the facts do not indicate significant integration, modification, or interdependence. 79 00:16:32.450 --> 00:16:39.196 The two promises are distinct on these facts. The Step 2 conclusion matters in later steps. 80 00:16:39.196 --> 00:16:54.395 Each performance obligation identified in Step 2 is a unit of account: the company allocates part of the transaction price to it in Step 4 and determines when to recognize that amount as revenue in Step 5. 81 00:16:54.395 --> 00:16:59.288 Microsoft's revenue note provides a real example of this judgment. 82 00:16:59.288 --> 00:17:14.856 Microsoft accounts for some software licenses separately, but it combines certain desktop applications and cloud services when their integration, interdependence, and interrelationship make them one performance 83 00:17:14.856 --> 00:17:15.672 obligation. 84 00:17:15.672 --> 00:17:27.068 The business setting is different from Atlas, but the distinct-goods-and-services question is the same. Account for a qualifying series as one performance obligation. 85 00:17:27.068 --> 00:17:41.965 The series rule requires a company to account for a series of distinct goods or services as one performance obligation when the goods or services are substantially the same and have the same pattern of transfer to the 86 00:17:41.965 --> 00:17:55.763 customer. That pattern exists only when both of these conditions are met: Each distinct good or service in the series would qualify for over-time recognition if the company accounted for it separately. 87 00:17:55.763 --> 00:18:04.001 The company would use the same method to measure progress toward complete satisfaction of each distinct good or service. 88 00:18:04.001 --> 00:18:15.534 For example, each day of a qualifying daily monitoring service may be distinct, but the company accounts for the series of daily services as one performance obligation. 89 00:18:15.534 --> 00:18:25.008 Separate product deliveries that transfer at points in time do not qualify merely because the products are similar or have the same price. 90 00:18:25.008 --> 00:18:37.397 Step 3: Determine the transaction price. The transaction price is the consideration the company expects to be entitled to for transferring the promised goods or services. 91 00:18:37.397 --> 00:18:53.284 Begin with fixed consideration, then evaluate amounts that can change. Estimate variable consideration. Refunds, rebates, price concessions, bonuses, penalties, and performance payments can make consideration variable. 92 00:18:53.284 --> 00:19:03.341 Estimation has two parts. First, select the method that better predicts the amount of consideration to which the company will be entitled. 93 00:19:03.341 --> 00:19:15.949 Then apply that method to estimate the amount: Expected value: probability-weight the possible amounts. This method often fits a range of outcomes or many similar contracts. 94 00:19:15.949 --> 00:19:31.981 Most likely amount: use the single most likely outcome. This method often fits an uncertainty with two possible outcomes, such as receiving all or none of a bonus. Use the chosen method consistently for that uncertainty. 95 00:19:31.981 --> 00:19:40.872 The resulting amount is the estimate of variable consideration; it is not automatically included in the transaction price. 96 00:19:40.872 --> 00:19:52.022 The variable consideration constraint is the separate requirement that limits how much of that estimate the company may include in the transaction price. 97 00:19:52.022 --> 00:20:04.411 Include an amount only to the extent that it is probable that recognizing it will not cause a significant reversal of cumulative revenue when the uncertainty is resolved. 98 00:20:04.411 --> 00:20:09.148 Here too, probable means likely to occur, not a fixed percentage. 99 00:20:09.148 --> 00:20:22.995 Relevant evidence includes how much of the outcome is outside the company's control, how long the uncertainty will remain, and whether experience with similar contracts predicts the outcome. 100 00:20:22.995 --> 00:20:34.728 If the company has received or has a right to consideration that it expects to refund, it reports a refund liability for the amount it does not expect to retain. 101 00:20:34.728 --> 00:20:44.130 The same expected refund is excluded from the transaction price. The company updates both estimates when the facts change. 102 00:20:44.130 --> 00:20:57.617 Estimation and constraint answer different questions: Estimation: Which method better predicts the consideration, and what amount results when the company applies that method? 103 00:20:57.617 --> 00:21:10.872 Constraint: How much of that estimated amount may the company include in the transaction price without creating a probable significant reversal of cumulative revenue later? 104 00:21:10.872 --> 00:21:24.850 Identify a significant financing component. A contract has a significant financing component when the timing of payment provides a significant financing benefit to the customer or the company. 105 00:21:24.850 --> 00:21:40.430 If the customer receives the good or service well before paying, the company may be financing the customer. If the customer pays well before receiving the good or service, the customer may be financing the company. 106 00:21:40.430 --> 00:21:48.875 Why separate financing from revenue? Revenue should measure the price of the good or service when control transfers. 107 00:21:48.875 --> 00:22:03.581 An additional amount charged solely because the customer pays later is interest, not revenue from the good or service. Likewise, a payment made in advance may include financing provided by the customer. 108 00:22:03.581 --> 00:22:19.234 Separating the financing effect ensures that revenue reflects the amount attributable to the promised good or service, while the effect of paying early or late is recognized separately as interest over the financing 109 00:22:19.234 --> 00:22:33.285 period. Use this process: Compare payment with transfer. Identify when the customer pays and when control of the promised good or service transfers. Identify who receives the financing benefit. 110 00:22:33.285 --> 00:22:42.822 Later payment may finance the customer; early payment may finance the company. Decide whether the financing benefit is significant. 111 00:22:42.822 --> 00:22:56.145 Consider the time between payment and transfer, the difference between the promised amount and the cash selling price, and relevant market interest rates. Separate the two components. 112 00:22:56.145 --> 00:23:05.973 Measure revenue at the cash selling price when control transfers. Recognize the financing effect as interest over the financing period. 113 00:23:05.973 --> 00:23:12.744 Suppose a company sells equipment to a customer and transfers control of the equipment today. 114 00:23:12.744 --> 00:23:26.765 The cash selling price is 100,000 dollars, but the contract requires the customer to pay 121,000 dollars two years from now. The two-year delay provides financing to the customer. 115 00:23:26.765 --> 00:23:41.568 The company recognizes 100,000 dollars of equipment revenue when it transfers control, not 121,000 dollars. It recognizes the remaining 21,000 dollars as interest income over the two years. 116 00:23:41.568 --> 00:23:54.257 The contract has not produced extra equipment revenue merely because the customer pays later. A long interval does not automatically create a financing component. 117 00:23:54.257 --> 00:24:08.121 For example, payment terms may protect one party from the other party's failure to perform, or the timing of payment may depend on a future event outside either party's control. 118 00:24:08.121 --> 00:24:14.231 In those cases, the payment schedule may serve a purpose other than financing. 119 00:24:14.231 --> 00:24:30.366 Topic 606 permits a practical expedient: a company need not adjust for a significant financing component when it expects, at contract inception, that one year or less will pass between transfer and payment. 120 00:24:30.366 --> 00:24:40.392 In this course, a problem requiring an adjustment will provide the cash selling price or the information needed to calculate it. 121 00:24:40.392 --> 00:24:53.209 Step 4: Allocate the transaction price. The first three steps supply the inputs for Step 4. Step 1 established that the company has a contract to which Topic 606 applies. 122 00:24:53.209 --> 00:25:03.463 Step 2 identified the separate performance obligations in that contract. Step 3 determined one total transaction price for the contract. 123 00:25:03.463 --> 00:25:12.360 Step 4 now answers the next question: How much of that total transaction price belongs to each performance obligation? 124 00:25:12.360 --> 00:25:22.362 Why the company allocates the transaction price. Step 2 produced a list of performance obligations; in the figure there are five. 125 00:25:22.362 --> 00:25:30.504 Step 3 produced one total transaction price for the contract as a whole, not yet assigned to any of them. 126 00:25:30.504 --> 00:25:45.857 Step 4 divides that one total among the obligations, one allocated amount for each, and the allocated amounts add to the total transaction price. The five obligations in the figure are illustrative. 127 00:25:45.857 --> 00:25:55.704 An actual contract may contain a different number, and their relative standalone selling prices determine the allocated shares. 128 00:25:55.704 --> 00:26:05.890 The company allocates the transaction price in proportion to the performance obligations' standalone selling prices at contract inception. 129 00:26:05.890 --> 00:26:17.479 A standalone selling price is the price at which the company would sell a promised good or service separately to a similar customer in similar circumstances. 130 00:26:17.479 --> 00:26:26.484 If an observable standalone selling price is unavailable, the company estimates it using reasonably available information. 131 00:26:26.484 --> 00:26:34.013 Possible approaches include an adjusted market assessment or expected cost plus an appropriate margin. 132 00:26:34.013 --> 00:26:44.568 Unless estimating the standalone selling price is the question, this course will provide the amount needed for allocation. For each obligation: 133 00:26:44.568 --> 00:26:56.928 The allocation percentage equals the obligation's standalone selling price divided by the total of the standalone selling prices. 134 00:26:56.928 --> 00:27:07.104 The allocated transaction price equals the transaction price multiplied by the allocation percentage. 135 00:27:07.104 --> 00:27:17.120 The final allocations must add to the transaction price. A contract or list price is not automatically a standalone selling price. 136 00:27:17.120 --> 00:27:28.523 Relative standalone selling prices provide a consistent basis for associating consideration with the goods and services transferred to the customer. 137 00:27:28.523 --> 00:27:43.546 Without that basis, invoice labels or management preference could move revenue among obligations, and therefore among reporting periods, even though the economics of the exchange had not changed. 138 00:27:43.546 --> 00:27:57.106 Topic 606 contains exceptions for a discount or variable amount that relates to only part of a contract. Apply an exception only when the facts establish all of its conditions. 139 00:27:57.106 --> 00:28:13.440 For variable consideration, the payment must relate specifically to an obligation or distinct item, and assigning the amount there must remain consistent with the allocation objective for the contract as a whole. 140 00:28:13.440 --> 00:28:27.171 Step 5: Recognize revenue when control transfers. Step 4 assigned part of the transaction price to each performance obligation. Step 5 determines when each allocated amount becomes revenue. 141 00:28:27.171 --> 00:28:43.008 Apply the timing analysis separately because the customer may obtain control of different goods or services at different times. Begin by determining whether a performance obligation qualifies for over-time recognition. 142 00:28:43.008 --> 00:28:54.123 It qualifies when any one of these three conditions is satisfied: The customer simultaneously receives and consumes the benefits as the company performs. 143 00:28:54.123 --> 00:29:02.769 Service or software example: A customer receives continuous access to a software-as-a-service application for one year. 144 00:29:02.769 --> 00:29:11.850 Each day of access provides benefit during that day; the customer does not wait until year-end to receive the entire benefit. 145 00:29:11.850 --> 00:29:20.422 The company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced. 146 00:29:20.422 --> 00:29:35.315 Service or software example: A developer modifies software that the customer already controls in the customer's environment. The customer controls the enhanced software as the developer completes the work. 147 00:29:35.315 --> 00:29:49.773 Physical-product example: A contractor constructs an addition on land and an existing building controlled by the customer. The customer controls the construction in progress as the addition is built. 148 00:29:49.773 --> 00:30:03.866 The company's performance creates an asset with no alternative use to the company, and the company has an enforceable right to payment for performance completed to date. Both parts are required. 149 00:30:03.866 --> 00:30:10.841 The asset lacks alternative use when the company cannot readily redirect it to another customer. 150 00:30:10.841 --> 00:30:25.080 The payment right must compensate the company for work completed to date, including a reasonable profit margin, if the customer terminates for a reason other than the company's failure to perform. 151 00:30:25.080 --> 00:30:32.175 Service or intangible example: An engineering firm develops plans for a customer's unique facility. 152 00:30:32.175 --> 00:30:45.289 The plans cannot be redirected to another customer, and the contract gives the firm an enforceable right to payment for work completed to date if the customer cancels for convenience. 153 00:30:45.289 --> 00:30:52.169 Physical-product example: A manufacturer builds a turbine to a customer's unique specifications. 154 00:30:52.169 --> 00:31:06.359 The turbine cannot be sold to another customer without significant rework, and the contract provides an enforceable right to payment for work completed to date, including a reasonable profit margin. 155 00:31:06.359 --> 00:31:21.408 The examples illustrate the conditions; the product or service label does not determine the answer. Apply the relevant contract, control, alternative-use, and payment-right facts to each performance obligation. 156 00:31:21.408 --> 00:31:34.446 Over-time recognition: select a measure of progress. If at least one condition is satisfied, recognize the allocated amount as the company performs. 157 00:31:34.446 --> 00:31:49.862 The company must then choose a measure of progress that faithfully depicts how performance transfers to the customer. An output measure uses results delivered to the customer. 158 00:31:49.862 --> 00:32:07.392 An input measure uses resources consumed or efforts expended relative to the total expected inputs. Elapsed time is appropriate only when effort and benefit are transferred evenly through the period. 159 00:32:07.392 --> 00:32:11.096 Accenture example: why cost can measure progress. 160 00:32:11.096 --> 00:32:25.985 In its 2025 Form 10 K, Part II, Item 8, Note 2, "Revenues," Accenture explains that it uses costs incurred relative to estimated total costs for certain technology-integration consulting contracts. 161 00:32:25.985 --> 00:32:42.462 The note gives the reason: "Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the client." The important point is not that consulting companies always 162 00:32:42.462 --> 00:32:54.102 use a cost-to-cost measure. Accenture uses that input measure because the costs incurred for these contracts correspond to work transferred to the client. 163 00:32:54.102 --> 00:33:06.195 If significant costs did not reflect progress toward transferring the promised service, including them without adjustment would distort the measure of progress. 164 00:33:06.195 --> 00:33:14.736 The company would need to adjust the input measure or select a different measure that better depicts performance. 165 00:33:14.736 --> 00:33:29.484 Point-in-time recognition: identify when control transfers. If none of the three conditions is satisfied, recognize the allocated amount at the point when the customer obtains control. 166 00:33:29.484 --> 00:33:45.113 To identify that point, consider indicators that control of the promised asset has transferred to the customer, including: the company has a present right to payment. legal title has transferred. 167 00:33:45.113 --> 00:34:00.982 physical possession has transferred. the customer has the significant risks and rewards of ownership. the customer has accepted the asset. No single indicator applies mechanically in every contract. 168 00:34:00.982 --> 00:34:06.192 Evaluate the indicators together against the transfer of control. 169 00:34:06.192 --> 00:34:18.659 Record and report the contract. Revenue, billing, and cash collection are different events. Their order determines the customer-contract accounts. 170 00:34:18.659 --> 00:34:30.272 In Chapter 1's journal-entry sequence, cash received before service created unearned revenue because the company still owed the service. 171 00:34:30.272 --> 00:34:41.287 Chapter 2's accruals and deferrals showed the opposite timing: performance can create revenue and a receivable before collection. 172 00:34:41.287 --> 00:34:54.864 A S C Topic 606 retains those debit-and-credit patterns and adds an important distinction between a conditional contract asset and an unconditional receivable. 173 00:34:54.864 --> 00:35:11.012 How the order of events determines the contract balances. On the first path, performance comes first. Step 1, the company performs and transfers the promised good or service. 174 00:35:11.012 --> 00:35:30.129 It recognizes revenue and records a contract asset, because payment remains conditional. Step 2, the right to payment becomes unconditional. The company records a receivable and replaces the contract asset. 175 00:35:30.129 --> 00:35:47.483 Step 3, the company collects. It records cash and replaces the receivable. On the second path, billing or collection comes first. Step 1, the company bills or collects before performance. 176 00:35:47.483 --> 00:36:02.424 It records a contract liability, because it still owes goods or services. Step 2, the company performs. It recognizes revenue and reduces the contract liability. 177 00:36:02.424 --> 00:36:22.388 Event, Bill or collect before performance; Typical entry, Debit Receivable or Cash; credit Contract Liability; Statement effect, A liability remains until the company transfers the promised good or service. 178 00:36:22.388 --> 00:36:42.351 Event, Perform before the right to payment is unconditional; Typical entry, Debit Contract Asset; credit Revenue; Statement effect, The asset remains conditional on something other than the passage of time. 179 00:36:42.351 --> 00:36:57.566 Event, The right becomes unconditional; Typical entry, Debit Receivable; credit Contract Asset; Statement effect, The conditional right becomes a receivable. 180 00:36:57.566 --> 00:37:11.134 Event, Collect a receivable; Typical entry, Debit Cash; credit Receivable; Statement effect, Collection changes the asset held, not revenue. 181 00:37:11.134 --> 00:37:29.256 Event, Recognize revenue after an advance billing; Typical entry, Debit Contract Liability; credit Revenue; Statement effect, Performance reduces the remaining obligation to the customer. 182 00:37:29.256 --> 00:37:38.619 A receivable is an unconditional right to consideration: only the passage of time is required before payment is due. 183 00:37:38.619 --> 00:37:47.821 A contract asset is a right to consideration that still depends on another condition, usually further performance. 184 00:37:47.821 --> 00:38:01.463 A contract liability is an obligation to transfer goods or services for consideration already received or due. The company presents unconditional receivables separately. 185 00:38:01.463 --> 00:38:14.136 For the remaining rights and obligations in one contract, the relationship between performance and payment produces a contract asset or a contract liability. 186 00:38:14.136 --> 00:38:17.539 Adobe: why two future-revenue measures differ. 187 00:38:17.539 --> 00:38:33.741 Adobe's 2025 Form 10 K, Part II, Item 8, Note 2, "Revenue," includes a section titled "Deferred Revenue and Remaining Performance Obligations." It describes deferred revenue as: "billings or payments received in advance 188 00:38:33.741 --> 00:38:49.942 of revenue recognition" The same section explains that remaining performance obligations represent: "contracted revenue that has not yet been recognized" Adobe reported 7.03 billion dollars of deferred revenue and 22.52 189 00:38:49.942 --> 00:38:55.639 billion dollars of remaining performance obligations as of November 28, 2025. 190 00:38:55.639 --> 00:39:06.292 The amounts differ because remaining performance obligations include both deferred revenue and contracted amounts that have not yet been billed. 191 00:39:06.292 --> 00:39:19.460 Deferred revenue answers whether billing or payment occurred before performance. Remaining performance obligations answer how much contracted revenue has not yet been recognized. 192 00:39:19.460 --> 00:39:33.960 Neither amount is automatically revenue for the next year because Adobe must still satisfy the related performance obligations, and some of the revenue will be recognized after the next 12 months. 193 00:39:33.960 --> 00:39:51.725 Apply the five steps to Fairmont Health. The exhibit below contains the selected terms needed for the accounting analysis. It is a teaching document, not a complete legal agreement. Read the business terms first. 194 00:39:51.725 --> 00:39:58.512 Each step then returns to the relevant language and explains what it establishes. 195 00:39:58.512 --> 00:40:13.111 Selected contract terms between Sable Ridge Instruments, the seller, and Fairmont Health, the customer. Agreement date April 1, for the S R 400 diagnostic system. Clause A, purpose. 196 00:40:13.111 --> 00:40:28.919 Fairmont will use the S R 400 system in its diagnostic-testing operations. Sable will provide the equipment, supplies, and services described below, and Fairmont will pay the stated consideration. 197 00:40:28.919 --> 00:40:31.258 Clause B, goods and services. 198 00:40:31.258 --> 00:40:47.874 Sable will provide one standard S R 400 analyzer; installation and validation; 1,200 test kits in 12 scheduled batches; and continuous calibration monitoring from April 1 through March 31 three years later. 199 00:40:47.874 --> 00:40:59.085 Clause C, equipment and installation. Sable will deliver the analyzer by May 15. Fairmont may direct its use after delivery and acceptance. 200 00:40:59.085 --> 00:41:16.184 Installation uses standard procedures, does not modify the analyzer, and may be performed by other qualified vendors. Sable will complete installation and validation by December 20. Clause D, kits and monitoring. 201 00:41:16.184 --> 00:41:31.912 Each kit batch may be used when delivered. The first three batches are scheduled for October 31, November 30, and December 31; the remaining batches follow the delivery schedule in the agreement. 202 00:41:31.912 --> 00:41:47.478 The analyzer can use compatible kits from qualified suppliers. Monitoring provides continuous access to calibration support throughout the three-year service period. Clause E, price adjustment. 203 00:41:47.478 --> 00:42:01.593 Total stated consideration is 360,000 dollars. Fairmont will receive a 12,000 dollars credit if it processes more than 500 tests by December 15. Clause F, billing and payment. 204 00:42:01.593 --> 00:42:19.338 Sable will invoice 208,000 dollars when Fairmont accepts the analyzer, 40,000 dollars when installation and validation are complete, 8,000 dollars as each kit batch is delivered, and the remaining 16,000 dollars in equal 205 00:42:19.338 --> 00:42:22.080 quarterly monitoring installments. 206 00:42:22.080 --> 00:42:41.559 Each invoice is due within 30 days. Any earned credit will reduce the next invoice. Clause G, approval and remedies. This agreement becomes effective when signed by authorized representatives of both parties. 207 00:42:41.559 --> 00:43:00.288 Each party must perform its stated obligations. Either party may enforce the agreement and seek the stated remedies following the other party's breach. Both parties' authorized signatures are on file. 208 00:43:00.288 --> 00:43:10.152 Identify the contract. The five conditions require evidence from both the agreement and Sable's customer records. 209 00:43:10.152 --> 00:43:30.911 Evidence supporting the five contract conditions. Condition 1, approval and commitment. Clause G and both signatures show approval, enforceable obligations, and commitment to perform. Condition 2, identifiable rights. 210 00:43:30.911 --> 00:43:44.017 Clauses B through D state the goods and services Fairmont will receive and when it can use them. Condition 3, identifiable payment terms. 211 00:43:44.017 --> 00:44:02.480 Clauses E and F state the consideration, possible credit, invoice events, and 30-day payment period. Condition 4, commercial substance. Clause A exchanges a diagnostic system for consideration. 212 00:44:02.480 --> 00:44:13.768 The exchange changes the timing, amount, and risk of the parties' future cash flows. Condition 5, probable collection. 213 00:44:13.768 --> 00:44:25.248 Sable's credit file shows Fairmont has paid prior purchases when due and has sufficient resources to pay this agreement. 214 00:44:25.248 --> 00:44:37.274 Together, that evidence satisfies all five conditions. Sable therefore accounts for the agreement as a contract with a customer under A S C Topic 606. 215 00:44:37.274 --> 00:44:44.089 Sable signs a separate agreement with Fairmont's research affiliate two months later. 216 00:44:44.089 --> 00:44:58.440 It was negotiated separately, its price does not depend on the April agreement, and its promises do not combine with the April promises. Sable does not combine the two agreements. 217 00:44:58.440 --> 00:45:14.317 Identify the performance obligations. Clauses B through D identify the promises and supply the facts needed for the distinct analysis. Fairmont can use the standard analyzer with kits from a qualified supplier. 218 00:45:14.317 --> 00:45:28.832 Another qualified vendor can perform the standard installation, which does not significantly integrate, modify, or customize the analyzer. The analyzer and installation are therefore distinct. 219 00:45:28.832 --> 00:45:41.004 Each scheduled kit batch is usable when delivered and is not integrated with another promise. Each batch is distinct and transfers separately at a point in time. 220 00:45:41.004 --> 00:45:52.042 The calculations below aggregate the identical batch allocations for display; that presentation does not turn the batches into a Topic 606 series. 221 00:45:52.042 --> 00:46:05.953 Fairmont receives and consumes the calibration-monitoring benefit each day. Each day would qualify for over-time recognition, and Sable uses the same elapsed-time measure for each day. 222 00:46:05.953 --> 00:46:11.472 The monitoring services therefore form one series performance obligation. 223 00:46:11.472 --> 00:46:28.268 Determine the transaction price. Apply the Step 3 decisions in order: Begin with fixed consideration. Clause E states a fixed contract amount of 360,000 dollars. Identify the variable amount and its possible outcomes. 224 00:46:28.268 --> 00:46:38.872 If Fairmont processes more than 500 tests by December 15, it receives the 12,000 dollars credit and Sable is entitled to 348,000 dollars. 225 00:46:38.872 --> 00:46:55.900 If Fairmont does not exceed 500 tests, there is no credit and Sable is entitled to 360,000 dollars. Select and apply the estimation method. Because the credit has two possible outcomes, Sable uses the most likely amount. 226 00:46:55.900 --> 00:47:07.432 Fairmont processed 780 tests with its prior analyzer, the current year follows the same pattern, and little time remains before the measurement date. 227 00:47:07.432 --> 00:47:19.507 The more likely outcome is that Fairmont earns the 12,000 dollars credit, producing an estimated transaction price of 348,000 dollars. Apply the constraint. 228 00:47:19.507 --> 00:47:24.925 The 12,000 dollars credit is the maximum reduction under the contract. 229 00:47:24.925 --> 00:47:36.844 If Fairmont does not earn it, consideration increases to 360,000 dollars; it does not fall below the 348,000 dollars estimate because of this uncertainty. 230 00:47:36.844 --> 00:47:49.847 Using 348,000 dollars therefore does not expose recognized revenue to a later downward reversal from the usage credit, so Sable does not constrain the estimate further. 231 00:47:49.847 --> 00:48:02.928 Fairmont exceeds 500 tests on December 15, and Sable issues the credit. The uncertainty is resolved before year-end, and the final consideration remains 348,000 dollars. 232 00:48:02.928 --> 00:48:18.672 Fixed consideration of 360,000 dollars, minus the expected credit of 12,000 dollars, equals a transaction price of 348,000 dollars. 233 00:48:18.672 --> 00:48:35.300 Clause F ties invoices to acceptance, completion, delivery, and quarterly service. The scheduled payments occur close to the related transfers and do not provide either party with a significant financing benefit. 234 00:48:35.300 --> 00:48:48.947 Sable therefore does not discount the consideration or recognize a separate interest component. Its transaction price remains 348,000 dollars. Allocate the transaction price. 235 00:48:48.947 --> 00:48:58.829 Step 3 produced one 348,000 dollars transaction price, and Step 2 identified the obligations that must receive portions of it. 236 00:48:58.829 --> 00:49:15.378 Sable's pricing records show standalone selling prices of 200,000 dollars for the analyzer, 40,000 dollars for installation and validation, 120,000 dollars for the kit batches, and 40,000 dollars for monitoring. 237 00:49:15.378 --> 00:49:22.594 Sable first allocates the 360,000 dollars fixed consideration in proportion to those prices. 238 00:49:22.594 --> 00:49:35.378 Clause E makes the credit depend specifically on kit volume, and assigning it to the kit batches is consistent with the allocation objective for the full contract. 239 00:49:35.378 --> 00:49:41.496 Sable therefore assigns the 12,000 dollars variable amount to the kit batches. 240 00:49:41.496 --> 00:50:00.525 The allocation table has four obligations. The analyzer: standalone selling price 200,000 dollars, fixed consideration 180,000 dollars, final allocation 180,000 dollars. 241 00:50:00.525 --> 00:50:16.063 Installation and validation: standalone selling price 40,000 dollars, fixed consideration 36,000 dollars, final allocation 36,000 dollars. 242 00:50:16.063 --> 00:50:35.880 The twelve kit batches: standalone selling price 120,000 dollars, fixed consideration 108,000 dollars, expected credit negative 12,000 dollars, final allocation 96,000 dollars. 243 00:50:35.880 --> 00:50:52.094 The calibration-monitoring series: standalone selling price 40,000 dollars, fixed consideration 36,000 dollars, final allocation 36,000 dollars. 244 00:50:52.094 --> 00:51:10.560 In total: standalone selling prices 400,000 dollars, fixed consideration 360,000 dollars, expected credit negative 12,000 dollars, final allocation 348,000 dollars. 245 00:51:10.560 --> 00:51:19.983 The final allocation ties to the 348,000 dollars transaction price. Determine when to recognize each allocation. 246 00:51:19.983 --> 00:51:29.489 Apply the Step 5 timing decision to each obligation before calculating the amount recognized through December 31. 247 00:51:29.489 --> 00:51:42.530 The analyzer and installation use different recognition patterns, but both are fully recognized by year-end. The analyzer transfers at one point on May 15. 248 00:51:42.530 --> 00:51:55.486 Installation transfers over time, and Sable has completed it by December 20. The kit and monitoring obligations are only partially recognized by year-end. 249 00:51:55.486 --> 00:52:04.488 For the kits, 3 of 12 delivered batches means Sable recognizes 25 percent of the 96,000 dollars allocation: 250 00:52:04.488 --> 00:52:19.584 The kit allocation of 96,000 dollars, multiplied by 25 percent delivered, equals kit revenue of 24,000 dollars. 251 00:52:19.584 --> 00:52:36.664 For monitoring, Fairmont receives and consumes the benefit as Sable performs. Because the service and benefit are even throughout the three years, elapsed time faithfully depicts progress. 252 00:52:36.664 --> 00:52:40.752 Nine of 36 months have passed by December 31: 253 00:52:40.752 --> 00:52:55.680 The monitoring allocation of 36,000 dollars, multiplied by 9 months out of 36, equals monitoring revenue of 9,000 dollars. 254 00:52:55.680 --> 00:53:16.601 The completed analysis, obligation by obligation. The analyzer: point in time. Clause C gives Fairmont control upon delivery and acceptance on May 15. Allocation 180,000 dollars, revenue 180,000 dollars. 255 00:53:16.601 --> 00:53:37.626 Installation and validation: over time, under condition 2. The work enhances the analyzer Fairmont controls, and Sable completes the work on December 20. Allocation 36,000 dollars, revenue 36,000 dollars. 256 00:53:37.626 --> 00:53:55.352 The twelve kit batches: point in time for each batch. Fairmont controls 3 of the 12 kit batches delivered by December 31. Allocation 96,000 dollars, revenue 24,000 dollars. 257 00:53:55.352 --> 00:54:17.304 The calibration-monitoring series: over time, under condition 1, measured using elapsed time. Fairmont receives the benefit evenly, and 9 of 36 months have passed. Allocation 36,000 dollars, revenue 9,000 dollars. 258 00:54:17.304 --> 00:54:26.064 In total: allocation 348,000 dollars, revenue through December 31 of 249,000 dollars. 259 00:54:26.064 --> 00:54:42.358 Report Fairmont's year-end balances. By December 31, Sable has invoiced Fairmont 264,000 dollars after issuing the expected 12,000 dollars credit. 260 00:54:42.358 --> 00:54:57.312 Fairmont has paid 228,000 dollars, leaving a 36,000 dollars unconditional receivable. Sable has recognized 249,000 dollars of revenue. 261 00:54:57.312 --> 00:55:22.368 Contract activity through December 31. Amount invoiced, 264,000 dollars. Less revenue recognized, 249,000 dollars. Contract liability, 15,000 dollars. 262 00:55:22.368 --> 00:55:40.400 Sable presents the 36,000 dollars receivable separately from the 15,000 dollars contract liability. The credit to Fairmont has already settled the expected refund, so no refund liability remains at December 31. 263 00:55:40.400 --> 00:55:54.825 Check your understanding. Suppose Sable completes the 36,000 dollars installation, but billing still depends on Fairmont's quality group validating the work in January. 264 00:55:54.825 --> 00:56:13.114 Does Sable report a receivable or a contract asset on December 31? Pause to consider your answer. Here is the explanation. Sable reports a contract asset. Its right to payment still depends on customer validation. 265 00:56:13.114 --> 00:56:20.928 The right becomes a receivable when only the passage of time remains before payment is due. 266 00:56:20.928 --> 00:56:32.325 Apply the model independently: Northline Components. Northline Components and a customer sign a written agreement for a standard controller and a custom production mold. 267 00:56:32.325 --> 00:56:46.757 The agreement identifies both items, requires the customer to pay 40,000 dollars when the controller is delivered and 80,000 dollars as specified mold milestones are reached, and can be terminated only under stated 268 00:56:46.757 --> 00:56:57.345 conditions. Both parties are committed to perform. Northline's credit review shows that the customer has sufficient financing and a reliable payment history. 269 00:56:57.345 --> 00:57:09.416 The arrangement is expected to change the timing and amount of Northline's future cash flows. Northline earns another 10,000 dollars if the customer approves the mold by March 31. 270 00:57:09.416 --> 00:57:23.376 Approval either occurs or does not occur. At December 31, all engineering tests are complete, the customer has approved every prior mold at this stage, and no remaining factor is outside Northline's control. 271 00:57:23.376 --> 00:57:36.594 The controller is an off-the-shelf product that the customer can use with its existing equipment. Northline also designs and builds a mold for a new product with dimensions unique to the customer. 272 00:57:36.594 --> 00:57:47.452 Northline does not integrate the controller and mold, and neither item modifies the other. Their standalone selling prices are 40,000 dollars and 80,000 dollars. 273 00:57:47.452 --> 00:58:01.209 The customer pays the 10,000 dollars bonus only if the mold passes the customer's specified approval tests. Northline regularly sells similar molds for 90,000 dollars when they have passed the same tests. 274 00:58:01.209 --> 00:58:14.832 Northline delivers the controller on December 15. The contract prohibits Northline from redirecting the unfinished mold to another customer, and its unique dimensions would make another use impractical. 275 00:58:14.832 --> 00:58:30.232 The customer must pay for work completed to date plus a reasonable profit if it cancels for a reason other than Northline's failure to perform. Applicable law makes that clause enforceable. 276 00:58:30.232 --> 00:58:42.699 Northline uses labor and machine costs to measure progress because those inputs correspond to the design and production work transferred to the customer. 277 00:58:42.699 --> 00:58:54.677 At December 31, qualifying costs incurred are 20,000 dollars and total expected qualifying costs are 80,000 dollars. No abnormal waste is included. 278 00:58:54.677 --> 00:59:11.544 By December 31, Northline has billed 40,000 dollars for the controller and an unconditional 15,000 dollars mold milestone. The customer has paid the controller invoice but has not paid the milestone invoice. 279 00:59:11.544 --> 00:59:25.829 Question 1: Should Northline account for the agreement as a contract with a customer under A S C Topic 606? Pause to consider your answer. Here is the explanation. Yes. 280 00:59:25.829 --> 00:59:39.009 The signed agreement and the parties' commitment show approval. The promised items and payment schedule identify each party's rights and the payment terms. 281 00:59:39.009 --> 00:59:55.166 The expected change in future cash flows gives the arrangement commercial substance. The customer's financing and reliable payment history support the conclusion that collection is probable. 282 00:59:55.166 --> 00:59:58.992 All five contract criteria are therefore met. 283 00:59:58.992 --> 01:00:12.953 Question 2: What are the performance obligations? Pause to consider your answer. Here is the explanation. The standard controller and custom mold are two performance obligations. 284 01:00:12.953 --> 01:00:22.286 The customer can benefit from the controller with equipment it already has and from the mold in its production process. 285 01:00:22.286 --> 01:00:36.168 Northline does not provide a significant integration service, and neither item modifies or depends on the other. The two promises therefore pass both parts of the distinct test. 286 01:00:36.168 --> 01:00:55.148 Question 3: What is the transaction price? Pause to consider your answer. Here is the explanation. The bonus has two outcomes, and the most likely amount better predicts the consideration for this contract. 287 01:00:55.148 --> 01:01:08.601 The approval history, completed engineering tests, and lack of remaining factors outside Northline's control support including the 10,000 dollars. 288 01:01:08.601 --> 01:01:16.248 Northline concludes that it is probable that a significant reversal will not occur. 289 01:01:16.248 --> 01:01:30.240 Fixed consideration of 120,000 dollars, plus the bonus of 10,000 dollars, equals a transaction price of 130,000 dollars. 290 01:01:30.240 --> 01:01:39.086 Question 4: How is the transaction price allocated? Pause to consider your answer. Here is the explanation. 291 01:01:39.086 --> 01:01:50.165 The 120,000 dollars fixed consideration is allocated in proportion to the 40,000 dollars and 80,000 dollars standalone selling prices. 292 01:01:50.165 --> 01:02:04.137 The approval terms tie the bonus to the mold, and the resulting 90,000 dollars mold allocation is consistent with the price Northline charges for similar approved molds. 293 01:02:04.137 --> 01:02:13.728 Those facts support assigning the 10,000 dollars bonus to the mold rather than spreading it across both obligations. 294 01:02:13.728 --> 01:02:29.115 The allocation table has two obligations. The controller: fixed consideration 40,000 dollars, final allocation 40,000 dollars. 295 01:02:29.115 --> 01:02:53.904 The mold: fixed consideration 80,000 dollars, bonus 10,000 dollars, final allocation 90,000 dollars. In total: fixed consideration 120,000 dollars, bonus 10,000 dollars, final allocation 130,000 dollars. 296 01:02:53.904 --> 01:03:11.208 Question 5: How much revenue is recognized by December 31? Pause to consider your answer. Here is the explanation. The controller transfers at a point in time when the customer obtains control on December 15. 297 01:03:11.208 --> 01:03:27.348 Northline recognizes its 40,000 dollars allocation. The mold satisfies the third over-time condition. Its unique dimensions and the contractual restriction prevent Northline from redirecting it. 298 01:03:27.348 --> 01:03:43.237 The termination clause gives Northline a right to payment for work completed to date, including a reasonable profit. Neither fact would be enough by itself; the third condition requires both. 299 01:03:43.237 --> 01:03:56.631 The cost-based input measure depicts Northline's design and production work. Qualifying costs show 25 percent progress: 20,000 dollars divided by 80,000 dollars. 300 01:03:56.631 --> 01:04:08.112 The billing milestone does not measure progress because it states when Northline may invoice, not how much work Northline has transferred. 301 01:04:08.112 --> 01:04:23.280 The mold allocation of 90,000 dollars, multiplied by 25 percent progress, equals mold revenue of 22,500 dollars. 302 01:04:23.280 --> 01:04:42.727 Total revenue is 40,000 dollars plus 22,500 dollars equals 62,500 dollars. Question 6: What remains on the balance sheet? Pause to consider your answer. Here is the explanation. 303 01:04:42.727 --> 01:04:54.813 The unpaid 15,000 dollars milestone is a receivable because Northline's right to that amount is unconditional. 304 01:04:54.813 --> 01:05:17.666 Northline has recognized 62,500 dollars and billed 55,000 dollars, so the remaining 7,500 dollars is a contract asset. Collection of the controller invoice removes that receivable; it does not change revenue. 305 01:05:17.666 --> 01:05:26.016 Northline has no contract liability because performance is ahead of billing. 306 01:05:26.016 --> 01:05:42.954 Sources. F A S B Accounting Standards Update 2014-09, Revenue from Contracts with Customers. F A S B Revenue Recognition Implementation questions and answers. Microsoft 2025 Form 10 K, Note 1 revenue recognition. 307 01:05:42.954 --> 01:05:58.934 Accenture 2025 Form 10 K, Note 2 revenue recognition. Adobe 2025 Form 10 K, deferred revenue and remaining performance obligations. Return to the written chapter for the Northline Components contract. 308 01:05:58.934 --> 01:06:03.568 Work the six questions in order before opening any answer. 309 01:06:03.568 --> 01:06:20.746 Decide whether the agreement is a contract under Topic 606, name the performance obligations, set the transaction price, allocate it, compute the revenue recognized through December 31, and state what remains on the 310 01:06:20.746 --> 01:06:28.656 balance sheet. Then try the three Atlas checks and the variable-consideration explorer on the page.