Mary Streen is getting up to speed on the new guidance on revenue recognition. She is trying to understand the revenue recognition principle as it relates to the five-step revenue recognition process.

Question

What will be an ideal response?

Answer 1

The basic premise of the revenue recognition principle is that a company recognizes revenue in the accounting period when a performance obligation is satisfied. A key element of the revenue recognition principle is that a company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it receives, or expects to receive, in exchange for those goods or services.?Companies use an asset-liability model to recognize revenue. For example, when a company delivers a product (satisfying its performance obligation), it has a right to consideration and therefore has a contract asset. If, on the other hand, the customer performs first, by prepaying, the seller has a contract liability. Companies must present these contract assets and contract liabilities on their balance sheets.  Contract assets are of two types: (1) unconditional rights to receive consideration because the company has satisfied its performance obligation with a customer, and (2) conditional rights to receive consideration because the company has satisfied one performance obligation but must satisfy another performance obligation in the contract before it can bill the customer. Companies should report unconditional rights to receive consideration as a receivable on the balance sheet. Conditional rights on the balance sheet should be reported separately as contract assets. A contract liability is a company's obligation to transfer goods or services to a customer for which the company has received consideration from the customer.