Revenue Recognition Terms

Allocation is step four of the five-step model: distributing the transaction price of a contract to its performance obligations, generally in proportion to their standalone selling prices.

ASC 606 Revenue from Contracts with Customers is the US GAAP standard for revenue recognition. It was introduced by the Financial Accounting Standards Board (FASB) through ASU 2014-09 in May 2014. Public business entities generally applied it from 2018; other entities followed later.

A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but retains physical possession of it until it is transferred to the customer at a later date.

Collectibility is the assessment of whether it is probable that an entity will collect the consideration it is entitled to. Under ASC 606, it is a criterion for a contract to exist; under ASC 842, it affects lessor classification and income.

A contract asset is a company's right to consideration in exchange for goods or services already transferred to a customer, when that right is conditional on something other than the passage of time – for example, on future performance.

Contract combination is the requirement to account for two or more contracts as a single contract when they are entered into at or near the same time with the same customer (or related parties) and meet specific criteria.

A contract liability is a company's obligation to transfer goods or services to a customer for which it has already received consideration – or for which an amount of consideration is due – from the customer.

A contract modification is a change in the scope, the price, or both, of a contract that is approved by the parties. It can be written, oral, or implied by customary business practice.

The five-step model is the core framework of ASC 606 and IFRS 15. It defines the sequence in which companies determine when and how much revenue to recognize from contracts with customers.

IFRS 15 Revenue from Contracts with Customers is the international accounting standard that defines how and when companies recognize revenue. It was issued by the International Accounting Standards Board (IASB) in May 2014 and became effective for annual periods beginning on or after January 1, 2018.

A material right is an option granted to a customer to acquire additional goods or services in the future at a discount or for free, which the customer would not receive without entering into the current contract.

A performance obligation is a promise in a contract to transfer to the customer either a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer.

A practical expedient is an optional simplification explicitly permitted by an accounting standard that lets an entity depart from the full requirements in defined circumstances, reducing cost and complexity.

The principal versus agent assessment determines whether a company presents revenue gross (as principal) or net (as agent) when another party is involved in providing goods or services to the customer.

A remaining performance obligation (RPO) is the portion of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the reporting date. In short: contracted revenue that has not yet been recognized.

Right to use and right to access are the two categories of licenses of intellectual property (IP) that determine whether license revenue is recognized at a point in time or over time.

A significant financing component exists when the timing of payments agreed in a contract provides the customer or the company with a significant benefit of financing. In that case, the transaction price is adjusted for the time value of money.

The standalone selling price is the price at which a company would sell a promised good or service separately to a customer. It is the basis for allocating the transaction price to performance obligations under ASC 606 and IFRS 15.

The transaction price is the amount of consideration a company expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, such as certain sales taxes.

Variable consideration is any part of the transaction price that can change depending on future events – such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or usage-based fees.