Revenues are inflows of enhancements (assets) and/or settlements (liabilities), used for the continual operations of a company, once recognized using the realization principle (“virtual completeness” and “reasonable certainty”).
Realization Principle problems are inconsistent to FASB’s frameworks, industries treating it differently, and inconsistencies in dealing with complex arrangements, which led rise to the “Contracts with Customers” standard, providing a unified approach with the “Core Principle”, helping determine the “when” and “how much” of revenues.
Therefore, the Five Steps to note on the new standard, are (1) Identifying the Contract, (2) Identifying the Performance Obligation, (3) Determining the Transaction Price, (4) Allocating the Transaction Price, and (5) Recognizing Revenue when Performance Obligation is settled. Therefore, in identifying the contract, legal rights for a seller and customer are established.
Therefore, a customer is more likely to own a good (using the OLPRA trick) when there (1) exists an OBLIGATION to pay, (2) LEGAL TITLE to the asset, (3) PHYSICAL POSSESSION of the asset, (4) assumed RISKS AND REWARDS of ownership, and (5) ACCEPTED the asset. And knowing contracts can be explicit, implicit, oral, or written, a contract only exists (using the CARRP trick) when (1) COMMERCIAL SUBSTANCE exists, (2) APPROVED by seller and customer, (3) RIGHTS have been specified, (4) REPAYMENT TERMS have been established, and (5) PROBABLE that customers will collect the amount entitled. All of this to also say, a contract DOES NOT exist when neither the customer or seller has performed any obligations of the contract and the ability to terminate the contract with penalty exists. Knowing Step 1 is Step 6.