FAR Revenue Recognition: How Do You Actually Use the Five Steps?
Use revenue recognition as a sequence instead of memorizing five disconnected labels.
Step 1: identify the contract
Determine whether an enforceable arrangement with a customer exists under the applicable requirements. Do not jump to revenue before establishing the contract.
Step 2: identify performance obligations
Ask what distinct goods or services the company promised. A single contract can contain one performance obligation or several.
Step 3: determine transaction price
Determine how much consideration the entity expects to receive. Variable consideration, discounts, incentives, and similar facts can affect the amount.
Step 4: allocate the price
When multiple performance obligations exist, allocate consideration generally using relative standalone selling prices rather than dividing the contract price evenly.
Step 5: recognize revenue
Recognize revenue when or as each performance obligation is satisfied. Some obligations are satisfied at a point in time and others over time.
The takeaway
Contract. Obligations. Price. Allocation. Recognition.
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FAQ
Do all contracts have multiple performance obligations?
No.
Is cash collection the same as revenue recognition?
No. Cash timing and revenue timing can differ.
Should I memorize journal entries first?
Understand the five-step economics first, then attach the entries.