Revenue Recognition Model

 The new standard formed a completely new accounting model for revenue recognition. Its objective is to regulate the way the entities recognize revenue. Several entities may have an insignificant change, which result into the new standard whereas other entities can end up with a huge impact on adoption. Though, almost all the entities have to deal with the additional disclosure needs.

This latest standard on the revenue recognition is the principle-based approach relatively a “bright line” rules-based perspective. It is the only revenue recognition model used across all transactions and industries.

Five-Step Revenue Recognition Model

The primary principle of new standard is that an entity should identify revenue to represent the transfer of assured services and goods to customers in the amount that reflects contemplation to which the entity supposes to be permitted in exchange for those services or goods. To perform this purpose, the standard formed a five-step model for most of the entities to follow whenever recognizing revenue:

· Recognize the contracts or contract with the customer.

· Recognize the performance compulsions in the contract.

· Regulate the transaction cost.

· Assign the transaction cost to the performance compulsions in the contract.

· Recognize revenue when or as the entity satisfies the performance compulsion.

Recognize the Contract

In earlier standards this was quite straight forward. By applying ASU 606, one of the huge changes is the need to merge various contracts into the one for the objective of the financial reporting. This is needed in case the contracts have the same commercial purpose, are inter-reliant, or share a sole performance obligation.

Recognize Performance Obligations

When all contracts are recognized, and in case necessary, united, we are now needed to recognize each of the diverse or “bundled” performance compulsions within each contract. Such performance compulsions will be our benchmarks now for how and when we recognize revenue.

Regulate the Transaction Cost

Those days are gone when the stated cost of the contract is the decisive factor for actual value of the contract. Despite, we should now analyze the transaction cost of the contract by determining the consideration we expect to be entitled upon the completion of contract.

Assign the Transaction Cost

Among 5 steps in ASU 606, this is one; most people get stuck. Three models are available for the utilization when assigning the transaction cost among its performance compulsions. Such models are the expected price plus margin approach, attuned market approach, and the residual approach. Each model needs a detailed discussion to understand proper application truly, but for the brevities sake, recognition of these models will have to do.

Recognize Revenue

Finally it is time to recognize revenue. Revenue is identified as performance compulsions are satisfied. The main point to remember regarding this step is that the revenue should be recognized at a point in time, or either over time, and that these two approaches are exclusive mutually from each other.

ChargeMonk’s Automated Revenue Recognition

ChargeMonk helps you to manage your complete subscription business by the automated revenue recognition. Dealing with the complexities in finance and accounting has become easier with our GAAP-compliant revenue recognition and reporting.

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