I read up on Revenue Recognition a while back and these are my notes. Disclaimer: My education came mostly from YouTube videos. #ADHD
US GAAP has this too. You have to know whose guidelines you're trying to comply to. Under FASB, it's 2018 for private companies. A year sooner for public companies. The new standards will affect certain entities and industries. Technology sector / Software already uses this method. Licenses, franchises, gift cards are examples of things that fall under this rule. For them VSOE is a big part of it. Vendor Specific objective evidence. Rebates, discounts, penalties and bonuses are part of this. Also, deliverables that represent a distinct performance obligation need to be broken out. A long term construction project doesn't have distinct parts that could be sold separately, which is part of the qualification.
Step 1: Identify a contract
Step 2: Identify the performance obligation
Step 3: Determine the transaction price
Step 4: Allocate the transaction price for each obligation
Step 5: Recognize the revenue at a point in time or over a period of time, or at the appropriate time for each performance obligation.
As it pertains to accounting systems. Some contracts need to be broken into smaller parts and the revenue booked as each task is completed. The guideline for breaking a task off by itself is complicated, but it's sort of separately deliverble. Called a performance Obligation. For software companies, upgrades and post upgrade support are examples of these separate elements of a contract.
Need to have a method for tracking the pieces of the contract and posting the revenue appropriately.
May need to track revenue both ways for the first year. Yes, both ways.
Sage Live handles Rev. Recog. now. Intaact can. NetSuite added Advanced Revenue for this. DSD seems to have an 3 add-ons that come close but none is addressing the issue of how you determine the value (see calculation example at bottom of this email). GL-1060, AR and SO for deferred revenue.
Examples of three different types:
Regular: An X-Box. Store orders 1000 at $240 each and promises to pay within 30 days
Over a period of time:
A building extension being built over time. Custom goods being made that can't be sold to someone else.
x-box subscription for a year sold for $60 each on Jan 1. Would go into deferred revenue. Each month, you recognize 1/12 of the revenue.
Multiple Performance Obligations:
The x-box sale is a system plus a subscription for the service. But as a package deal, it sells at a discounted price of $250. These meet the rule of being distinct, can and might be sold separately, and you can identify the two parts. The transaction price has to be allocated. Since a box is 240 and a sub is 60, the calculation is (240/(240+60))=80% for the box and 20% for the subscription. So in month one, book 200 to sales and 50 to deferred rev. Then chip away at the deferred revenue and book it to service revenue every month, including month1.