Revenue recognition over time is the defined term. As a result, revenue recognition at a point of time is the valid recognition principle when the definition of revenue recognition over time is not met. A vendor satisfies a performance obligation and recognises revenue over time when one of the following three criteria is met:
The customer simultaneously receives and consumes the benefits provided by the contractor’s performance as the contractor performs.
Routine or recurring services like cleaning services
The contractor’s performance creates or enhances an asset that the customer controls as the asset is created or enhances
Building an asset on a customer’s site
The contractor’s performance does not create an asset with an alternative use to the contractor and the contractor has an enforceable right to payment for performance completed to date.
Building a specialised asset that only the customer can use, or building an asset to a customer order
1. The customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance
This criterion applies to certain contracts for services, and in some cases it will be straightforward to identify that it has been met. For example, for routine or recurring services (such as cleaning services) it will be clear that there is simultaneous receipt by the customer of the vendor’s performance. The concept of control of an asset applies, because services are viewed as being an asset (if only momentarily) when they are received and used. Revenue recognition over time
For other performance obligations, it may be less straightforward to identify whether there is simultaneous receipt and consumption of the benefits from the vendor’s performance. In these cases, a key test is whether, in order to complete the remaining performance obligations, another vendor would need to substantially re-perform the work the vendor has completed to date. If another vendor would not need to do so, then it is considered that the customer is simultaneously receiving and consuming the economic benefits arising from the vendor’s performance.
In determining whether another entity would need substantially to reperform the work completed to date, the vendor is required to:
- Disregard any contractual or practical barriers to the transfer of the remaining performance obligations to another entity; and
- Presume that any replacement vendor would not benefit from an asset that it currently controls (such as a work in progress balance).
2 The vendor creates or enhances an asset controlled by the customer Revenue recognition over time
This criterion is most likely to be relevant when an asset is being constructed on the customer’s premises. The asset being sold by the vendor could be tangible or intangible (for example, a building that is being constructed on land owned by the customer, or customised software that is being written into a customer’s existing IT infrastructure).
3 The vendor’s performance does not create an asset for which the vendor has an alternative use, the vendor has an enforceable right to payment for performance completed to date
This two-step criterion may be relevant to entities in the construction and real estate sector, and also applies when a specialised asset is to be constructed that can only be used by the customer. It may also apply when an asset is to be constructed to a customer’s specification. Revenue recognition over time