Quick recap. Revenues are inflows of enhancements and settlements (of assets and liabilities), which help constitute the central operations to continue, in which in the past was used to determine “when” and “how much” from the Realization Principle (not that good of an idea), where earnings were processed when earnings were “virtually complete” and collections were “reasonable certainty”. This gave rise to the better, “Revenue from Contracts with Customers” standard, giving spotlight to the “Core Principle” which was better aligned to FASB’s conceptual framework, provided some more unified approach cross industries, and can handle more complex arrangements.
There are five steps to the standard being identifying the contract, identifying the performance obligation, determining the transaction price, allocating the transaction price, and recognizing revenue when the performance obligation has been settled. For the first step, (identifying the contract), it is important to know that a contract exists (whether it be written, oral, implicit, or explicit), when there is a commercial substance, approval from parties, rights have been specified, repayment terms have been determined, and probable that customers will collect (requires performance obligation and a penalty if someone leaves the contract). And a customer is known to own a good when there is an obligation to pay, legal title to the asset exists, there is physical possession of the asset, risks and rewards have been transferred, and it is accepted.
Now in terms of the second step in the “Contract with Customers” Standard, identifying multiple performance obligations exists when a good/service must be CAPABLE of being distinct and SEPERATELY IDENTIFIABLE from other goods/services in the contract. An example of this can include a professional league. Of the many products, they can sell a subscription based package to watch their games, or you may watch a stand-alone game in an arena, satisfying the capability of being distinct, and separately identifiable. It is also important to note, when identifying a performance obligation, what are not obligations are PREPAYMENTS, as they are part of the price, QUALITY ASSURANCE as it is part of the service to provide no defects, and RIGHT OF RETURN, as it part of the delivery obligation.
What are considered performance obligations are EXTENDED WARRANTIES, where the customer has the option to purchase a separate warranty or provide service beyond quality assurance or OPTIONS, where there is “material right” to provide an obligation on a certain date. For instance, if you sell a product for $100, and provide a 10% discount to purchase another item alongside it worth the same price, then you have a discount value of 10%. Now, if you believe there is a 60% chance it will be claimed, your account for an estimated “Stand Alone Selling Price” of $6. Therefore, you will debit $106 in cash, credit sales revenue by $100 and deferred revenue by $6. Knowing Step 2 is Step 7.