Long-term contracts
When a performance obligation is satisfied over time, revenue is recognized using a measure of progress:
- Input methods — cost-to-cost (costs incurred ÷ total estimated costs), labor hours
- Output methods — units delivered, milestones achieved, surveys of performance
EXAMPLE (cost-to-cost): Contract price $10,000,000; total estimated costs $8,000,000; costs incurred to date $2,000,000. Percentage complete = 25%. Revenue recognized to date = $2,500,000; gross profit to date = $500,000.
IMPORTANT — losses: An expected loss on the entire contract must be recognized immediately and in full, in the period it becomes evident — not spread over the remaining term. This is true whether revenue is recognized over time or at a point in time.
Licensing
| License type | Recognition |
|---|---|
| Right to use — functional IP, static as of the transfer date (e.g., software, completed film) | Point in time |
| Right to access — symbolic IP the entity continues to support (e.g., brand, franchise) | Over time |
Sales- or usage-based royalties on licenses of IP are recognized at the later of when the sale/usage occurs or when the related performance obligation is satisfied.
Principal vs. agent
The entity is a principal if it controls the good or service before transfer — indicators include primary responsibility for fulfillment, inventory risk, and discretion in setting prices. A principal reports revenue gross; an agent reports only its net commission.
Contract modifications
- Treated as a separate contract if it adds distinct goods/services at their standalone selling price
- Otherwise, either a prospective adjustment (remaining goods are distinct) or a cumulative catch-up (single performance obligation partially satisfied)
EXAM TIP: A contract asset arises when the entity performs before payment is unconditionally due (conditional right); a receivable arises when the right is unconditional. A contract liability is payment received in advance of performance.