Finance

Revenue Recognition—Case Study-1

On 29 February, Vendor enters into a contract with a customer to provide, deliver and install manufacturing equipment for 15,000 due on delivery.

      Vendor delivers the equipment on 31 March and installs it during April. Title to the equipment passes to the customer at delivery.

      Vendor separately sells the equipment (inclusive of the delivery service) and installation service for 14,000 and 2,000 respectively.

      Vendor does not sell delivery services separately from equipment. The allocation of the transaction price of 15,000 would be as follows:

                                 Stand-alone              Allocation of                   Measurement of

                                  selling price               discount               Performance obligation

                                       (A)                              (B)                   (A) - (B)

Machine and deliver     14,000                875        (a)          13,125

Installation            2,000                125        (b)           1,875

Total                       16,000              1,000                       15,000

(a)1,000 × (14,000 ÷ 16,000) 

(b)1,000 × (2,000 ÷ 16,000)

Vendor satisfies the equipment and delivery services obligation on 31 March when the equipment is transferred to the customer.

Vendor satisfies the installation service obligation in April as installation progresses.

Therefore, Vendor’s net contract position and revenue recognition are as follows:

                   Net contract position at end of month  Revenue recognition during month

   February                           ---                                                 ----

   March                             1,875 (a)...