Key differences between ASC 605 and SAB 104 are discussed in step by step.
Are you ready for the new standard?Are you aware of how revenue from contracts with customers will affect your organization?You are not alone.According to a survey conducted by the Financial Executives Research Foundation, a vast majority of companies are not prepared for the new revenue recognition standard.
The core principle of the new revenue recognition standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled.
In order to recognize revenue in accordance with the core principle, a new five-step model should be followed.There are five steps.
We will focus on the first step in this post, which is to identify the contract with the customer.The other steps in the new revenue recognition model will be covered in this series.
A contract is an agreement between two or more parties that creates rights and obligations.The enforceability of the rights and obligations in a contract is a matter of law.Contracts can be written, oral or implied.
When all of the following criteria are met, an entity should account for a contract with a customer.
Metro Man sells custom leather man bags.Metro Man is an existing customer of Paulie's Purses and received a large order on December 15.Metro Man normally requires the signatures of authorized company representatives and approval from their sales committee in order to get a written sales agreement from a customer.Representatives from Metro Man and Paulie's Purses signed the agreement.The sales committee for Paulie's Purses is currently on a sabbatical and will not be able to approve the order and sign the agreement until January.They approved the contract on the phone call.Metro Man decided to ship the man bags the last week in December due to the size of the order and their relationship with Paulie's Purses.The man bags will arrive at Paulie's Purses on December 31.
Can Metro Man recognize revenue on December 31 if Paulie's Purses sales committee doesn't approve the order?
SAB 104 requires persuasive evidence of an arrangement in order to recognize revenue.The agreement of the sale is what persuasive evidence of a sale represents, according to the SEC.All criteria are not met until signed by both parties, if a written contract is considered evidence of normal business practice.
All transactions of the same kind within a company should be consideredpersuasive evidence.Delivery cannot be used as a substitute for oral agreements.Either the agreement exists in its final form or not.
It depends on whether the contract was deemed legal on December 31 or not.
The definition of a contract is based on the fact that an agreement between two or more parties creates enforceable rights and obligations.The agreement doesn't need to be in writing.If the agreement creates rights and obligations that are binding against the parties, it is a contract.
The legal framework that exists to ensure that the parties' rights and obligations are upheld is a question to be considered when determining whether a contractual right or obligation is enforceable.There are factors that determine enforceability.
When an entity's policy for recognizing revenue was not followed, improper revenue recognition has occurred.Legal enforceability is the focus of the new standard.Even if the contract is different from normal and customary business practice, it will still exist.
The impact of applying step 1 of the new revenue recognition model will be small.When transitioning from SAB 104 to ASC 606, companies need to review their sales contracts to make sure they are legal.
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