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Revenue Recognition Principle, Criteria And Accounting Treatment

Revenue Recognition Principle

I work in the accounting department of a small but growing business with a very small accounting and finance department.  We’ve shipped a product order but haven’t installed it yet and don’t plan to for some time. Should we book it as revenue now? What are the considerations?

Answers

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

The question is can you separate the product from the installation. This hinges on whether the two have "standalone value," the primary factor being whether the installation services could conceivably be done by another vendor (even if they never have been). See ASU 2009-13. Also the payment for the product should be independent of the installation services, and not variable or refundable in the event you never did the installation.

Having separate product and services contracts helps. You could have separate product and services master agreements, so new product and services orders could be attached to each respectively in the future.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

The actual FASB Multiple-Deliverable Revenue Arrangements revised code established a hierarchy -

Previously - GAAP required vendor specific or third party evidence of selling price to separate deliverables in a multi-deliverable arrangement. If you did not have such evidence, you would need to wait until all pieces were delivered to recognize revenue.

Revised - "The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third party evidence is available."

Find the code and look at page 19 (605-25-55-20) example Entity E. Without knowing your specifics, I can't tell you if it applies.

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