Methods that can be used to estimate progress toward completion are referred to as

MEASURING THE PROGRESS FOR OVERTIME PERFORMANCE OBLIGATION

An entity shall for each performance obligation that it satisfies OVER TIME, recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation.

1. Appropriate methods of measuring progress include output methods and input methods. In determining the appropriate method for measuring progress, an entity shall consider the nature of the good or service that the entity promised to transfer to the customer.
2. When applying a method for measuring progress, an entity shall exclude from the measure of progress any goods or services for which the entity does not transfer control to a customer. Conversely, an entity shall include in the measure of progress any goods or services for which the entity does transfer control to a customer when satisfying that performance obligation.
3. As circumstances change over time, an entity should update its measure of progress to depict its obligations completed to date.
4. Reasonable measures of progress
5. An entity shall recognize revenue for a performance obligation satisfied over time only if the entity can reasonably measure its progress toward complete satisfaction of the performance obligation.
6. In some circumstances (for example, in the early stages of a contract), an entity may not be able to reasonably measure the outcome of a performance obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation. In those circumstances, the entity shall recognize revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation.

OUTPUT METHOD

Measurement is based on the customers value of the goods or services transferred.

“Output methods recognize revenue on the basis of direct measurements of the value of the goods or services transferred to date relative to the remaining goods or services originally promised under the contract. Output methods include calculations such as analysis of performance completed till date, appraisals of results achieved, milestones achieved, time elapsed, and units produced/delivered.”

When an entity evaluates whether to apply an output method to measure its progress, the entity should consider whether the output selected would faithfully depict the entity’s performance toward complete satisfaction of the performance obligation.

As a practical expedient, if an entity has a right to consideration from a customer of an amount that relates directly with the value to the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice.

The disadvantages of output method is that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an entity.

INPUT METHOD

The revenue is measured based on the efforts/inputs made towards the performance obligation.

“Input methods recognize revenue on the basis of the entity’s efforts or inputs towards satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected efforts/inputs towards the performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognize revenue on a straight-line basis.”

The drawback of the input method is that there may not be direct relationship between the efforts/inputs and the transfer of goods and services to the customer. Therefore, an entity should exclude from an input method the effects of any inputs that do not depict the entity’s performance in transferring control of goods or services to the customer.

For example, when using a cost-based input method, an adjustment to the measure of progress may be required in the following circumstances:

• When the cost incurred does not reflect the POB satisfied like wastage.
• When cost is not proportionate to the POB satisfied, like recognition of cost in accordance with the revenue.

WHEN TO RECOGNIZE REVENUE

Revenue should be recognized by an entity when (or as) it satisfies a Performance Obligation by transferring the goods and services to the customer.

A Performance Obligation is a promise in a contract to transfer goods or services to a customer, for more please refer Step 2 – Identify the Performance Obligation in the Knowledge Center.

“The Performance Obligation gets satisfied when the control of goods and services is transferred to the customer”

Per ASC 606-10-20 control means “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.”

An entity should consider following indicators of the transfer of control, which include, but are not exhaustive:

1. The entity has a present right to payment from the customer for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

The amount of revenue to be recognized is the amount allocated per the Step 4 – allocation of transaction price to the satisfied Performance Obligation.

What methods can be used to estimate progress toward completion for the purpose of recognizing revenue over time?

What are the methods for measuring progress towards complete satisfaction of a performance obligation satisfied over time?

What is an output method?

What is step five of the revenue recognition process?