Revenue recognition on early contract buy-out
Paul Shapiro (Consultant, Paul G. Shapiro, CPA)
| Jan 4, 2012My company recognizes revenue monthly on a recurring revenue basis. A customer is ending their contract early and buying out their remaining term (all in 2012) at a discount. Since no additional services will be provided, can I recognize all of the revenue in 2011?
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Answers
Company: Consultant
Hi Paul....if I understand your question correctly, the customer is paying you an early termination fees for the cancellation of the contract in 2011, and you will not have any future performance obligations in 2012 under this contract.
In my opinion, based on the above facts, you should be able to recognize the revenue ON THE DATE of the cancellation of the contract.
Company: Paul G. Shapiro, CPA
Thanks, I'll confirm the facts and record accordingly. Is there any citation to GAAP that you can provide?
Company: Consultant
Here you go......also confirm that there are no other side agreements entered into along with the cancellation this contract that is being cancelled. Otherwise, you will need to conduct some additional analysis.
Below is the extract from SAB Topic 13.A on Revenue Recognition that is now codified under FASB's ASC 605-10-S99-1:
"The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met:
- Persuasive evidence of an arrangement exists,
- Delivery has occurred or services have been rendered,
- The seller’s price to the buyer is fixed or determinable, and
- Collectibility is reasonably assured."
Source: http://www.sec.gov/interps/account/sabcodet13.htm
My Best,
Sunil
Company: Consultant
Just wanted to update the above comment that SAB Topic 13.A was updated with SAB 104. Below is the link to the SAB 104 document.
http://www.sec.gov/interps/account/sab104rev.pdf
Company: TTX
There is a minor amount of ambiguity here as it is not clear if you provide a regular level of monthly service or provide an "open availability". If "availability is a substantial feature, final revenue should be recognized in the period terminated [2012?]. If terminated in early 2012 and revenue is for active performance, all revenue recognition requirements, identified by Sunil, are met by the end of 2011.