Generally the staff believes that, in view of Company A’s business practice of requiring a written sales agreement for this class of customer, persuasive evidence of an arrangement would require a final agreement that has been executed by the properly authorized personnel of the customer. Question: May Company A recognize the revenue in the current fiscal quarter for the sale of the product to Customer Beta when (1) the product is delivered by the end of its current fiscal quarter and (2) the final written sales agreement is executed by Customer Beta’s authorized representative within a few days after the end of the current fiscal quarter? Customer Beta’s purchasing department has orally agreed to the sale and stated that it is highly likely that the contract will be approved the first week of Company A’s next fiscal quarter. However, Customer Beta does not sign the agreement because Customer Beta is awaiting the requisite approval by its legal department. Company A prepares a written sales agreement, and its authorized representative signs the agreement before the end of the quarter. Company A’s normal and customary business practice for this class of customer is to enter into a written sales agreement that requires the signatures of the authorized representatives of the Company and its customer to be binding. Customer Beta places an order for the product, and Company A delivers the product prior to the end of its current fiscal quarter.
Persuasive evidence of an arrangementįacts: Company A has product available to ship to customers prior to the end of its current fiscal quarter. The staff believes that the determination of the units of accounting within an arrangement should be made prior to the application of the guidance in this SAB Topic by reference to the applicable accounting literature. Some revenue arrangements contain multiple revenue-generating activities. The seller’s price to the buyer is fixed or determinable, 5 and.Delivery has occurred or services have been rendered, 4.Persuasive evidence of an arrangement exists, 3.The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met:
In addition, paragraph 84(d) states that “If services are rendered or rights to use assets extend continuously over time (for example, interest or rent), reliable measures based on contractual prices established in advance are commonly available, and revenues may be recognized as earned as time passes.”
Paragraph 84(a) continues “the two conditions (being realized or realizable and being earned) are usually met by the time product or merchandise is delivered or services are rendered to customers, and revenues from manufacturing and selling activities and gains and losses from sales of other assets are commonly recognized at time of sale (usually meaning delivery)”. 2 Concepts Statement 5, Recognition and Measurement in Financial Statements of Business Enterprises, paragraph 83(b) states that “an entity’s revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues”. However, in the absence of authoritative literature addressing a specific arrangement or a specific industry, the staff will consider the existing authoritative accounting standards as well as the broad revenue recognition criteria specified in the FASB’s conceptual framework that contain basic guidelines for revenue recognition.īased on these guidelines, revenue should not be recognized until it is realized or realizable and earned. 1If a transaction is within the scope of specific authoritative literature that provides revenue recognition guidance, that literature should be applied. The accounting literature on revenue recognition includes both broad conceptual discussions as well as certain industry-specific guidance. Inconsequential or perfunctory performance obligationsĪ.Codification of Staff Accounting Bulletins - Topic 13: Revenue RecognitionĬodification of Staff Accounting Bulletins Topic 13: Revenue Recognition