Fenrijinn The Intacct system includes accounting, contract management, revenue management, project and fund accounting, inventory management, purchasing, vendor management, financial consolidation and financial reporting applications, all delivered over the Internet via cloud computing. Given the narrow scope of ASCan entity should carefully evaluate a service contract in the context of the guidance in ASC before applying the other guidance in that subtopic which includes the percentage of completion method to account for the services provided. Financial Reporting Resource Center. What is your Current Accounting System? At the end of Charles was managing a team of 19 with a management dotted line to the Sr. If the customer is receiving value as each act is performed, the proportional performance method should be used.
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First, an entity determines whether a change to a contract qualifies as a contract modification. Second, the entity determines whether the change meets the requirements for treatment as a separate contract. A contract is considered separate when the change is comprised of the addition of distinct goods or services at a price comparable to their standalone selling prices.
This article addresses proper accounting treatment for modifications that are not treated as separate contracts. Step 3: Determine proper accounting treatment for contract modifications If the contract modification is not considered a separate contract, the modification is combined with the original contract. There are two methods to account for these contract modifications. An entity should choose the method that most appropriately aligns with the facts and patterns of the modified contract.
The accounting model for contract modifications depends on the nature of all remaining goods and services at the time of the modification not just those added by the modification. Method 1 — Prospective Treatment Distinct Goods and Services If the remaining goods and services are distinct from those in the original contract, but the modification does not meet the other separate contract criteria i.
Revenue already recognized on the original contract is not adjusted. All remaining transactions are accounted for on a prospective basis: unrecognized consideration is allocated to the remaining performance obligations. The agreement outlines that Equipment Company will ship one unit of equipment every month for one year starting on January 1, 20X1.
On September 1, 20X1, after delivery of the first eight units, Equipment Company agrees to a contract modification to deliver six units of equipment used to assemble water bottles.
Equipment Company will continue to recognize revenue from each unit separately on delivery. Equipment Company concludes that the delivered keychain equipment units are distinct from those still undelivered.
Although there are additional, distinct goods being promised by Equipment Company, the price of those additional goods are not comparable to their standalone selling price. Under the new contract, revenue is allocated to each item to be delivered based on its relative standalone selling price. For more information, see Standalone Selling Prices. The entity adjusts revenue previously recognized to reflect the changes of the modification to the transaction price.
This ensures that revenue recognized measures progress toward completion of the performance obligation on a cumulative catch-up basis. The building will take 24 months to complete and will be built on land owned by Grump Company. Construction Company accounts for the goods and services provided as a single performance obligation satisfied over time. It also determines that the most appropriate method to measure progress of completion is through the input measure of costs incurred.
On this same date, Grump Company requested a change in the scope of the contract: to increase the size of the parking garage. It is also estimated that the changes will require an additional 6 months to complete construction. An analysis concludes that the additions are not distinct from the goods and services promised in the original or now-modified contracts. Therefore, the additional goods and services are part of the same performance obligation from the original contract.
Comparison to ASC Guidance for contract modifications under ASC varied between industries, but was most extensive for change orders and claims for construction- and production-type contracts ASC This shares some similarities with the guidance under ASC As most other industries did not have as extensive authoritative guidance, entities relied on guidance from accounting firms and followed their own, internally generated policies.
Under ASC , entities will need to critically evaluate their longstanding practices and policies. It is unlikely that construction- and production-type industries will see major changes when accounting for changes to a contract.
ASC has similar requirements of additional, distinct promised goods and services at a comparable price in order for a change to be a separate contract. However, all entities will need to carefully examine modified contracts that were considered completed under ASC because performance obligations associated with those modifications may be considered unsatisfied under ASC for more on this, see Contract Modifications — The Hindsight Expedient.
Conclusion ASC provides authoritative guidance to a subject that, in many industries, had none. Under ASC , many entities relied on firm guidance and other non-authoritative sources to develop accounting policies for contract modifications. The transition to forces entities to review longstanding policies and practices to ensure they are in line with authoritative guidance.
If there are no distinct goods or services provided, the modification is combined with the original contract by adjusting revenue on a cumulative catch-up basis. Companies are dealing with impracticalities of transition guidance pertaining to contract modifications.
Some find it costly and overly difficult to retrospectively apply this guidance to all their contract modifications because they have numerous decades-long contracts with multiple modifications. Section 3. Section Section 2. Author Christian Jones.
Service contracts: Which method should you consider?
Meztilkis When should the percentage of completion method be used to account for a service contract? Identifying the units of account in a service contract requires consideration of the guidance in ASCRevenue Recognition — Multiple-Element Arrangementsand perhaps other specific multiple-element arrangement guidance in the Best Practices in Services Revenue Recognition — ASC , ASC , ASC In other words, if a service contract consists of two services that each represent a unit of account, whether the proportional performance or completed performance method should be applied is determined separately for each service. Instead, when these are in a loss position, they should be accounted for similar to other executory contracts in a loss position, which is to only recognize a on the contract when it has been incurred. While there is specific guidance in ASC to address certain issues e.
ASC 605 Revenue Recognition
Golmaran The mechanics of the percentage of completion method may result in the recognition of an unbilled receivable as an asset when the revenue recognized based on the percentage complete is greater than the amount the entity has billed in accordance with the contract. Under SAB Topic 13, the following four criteria must be met prior to recognizing revenue: In many cases, determining whether the proportional performance or completed performance method should be used to account for a service contract requires exercising significant judgment. As is often the case with an accounting question, this answer leads to additional questions, including the following: Director of Revenue Recognition at SuccessFactors, a web 2. What accounting guidance should aasc applied to service contracts that do not fall within the scope of ASC? Applying the guidance in ASC results in using one of the following two accounting methods, depending on the facts and circumstances: Determining whether the proportional performance or completed performance method should be applied to a service contract that does not fall within the scope of or other specific guidance in the ASC requires consideration of the nature of the acts being performed by the entity to provide the service and the relative value of those acts to the The two primary accounting methods discussed in the ITC are referred to as the proportional performance and completed performance methods. As such, the proportional performance method should be used and the measurement of progress to completion should be based on the labor hours provided.
ASC 605-35 PDF