Step 1 in the Revenue Recognition Standard: Identify the contract with the customer
Last month, we talked about the need to plan for the new revenue recognition standard. This month, we will look at the first step in implementing the standard, Identify the contract with the customer.
A “contract” can be in many forms: written, oral, implied by customary business practices, etc. It is defined as an agreement between two or more parties that creates enforceable rights and obligations. Enforceability is a matter of law.
A contract with a customer should be accounted for under the new guidance when all of the following criteria are met:
- Parties to the contract have approved it and are committed to perform their respective obligations
- The entity can identify:
- Each party’s rights regarding goods or services to be transferred
- Payment terms for the goods and services to be transferred
- The contract has commercial substance (risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract)
- Collectability of consideration is probable (“likely to occur”)
It is recommended that a company assign individual staff or a committee to gain an understanding of the standard and begin its implementation. For more information, feel free to contact SDK’s Brandon Reinschmidt.