Accounting: The Language of Business - Vol. 2 (Intermediate: Part 124)

With the onset of the industrial revolution in 1760, there was a proliferation of companies and the need for more advanced accounting systems. The development of corporations also created larger groups of investors, and more complex structures of ownership, all requiring accounting systems to adapt.

Revenue Recognition (Part K)

by

Charles Lamson

Step 5: Recognize Revenue When, or As, Each Performance Obligation Is Satisfied (continued from Part 123)

Recall from Exhibit 8.1 from Part 114 and reintroduced below, the five steps in revenue recognition. In this post, we discuss Step 5.

Companies determine when to recognize revenue in Step 5 based on when the goods or services are transferred to the customer. A good or service is transferred when the customer obtains control. A customer has control of the asset if it has the ability to direct the use of the asset and receives all (or substantially all) of the remaining benefits of owning the asset.

Transfer over Time

Goods and services may be transferred to the customer over time or at a point in time. If the goods or services are transferred over time, then the seller recognizes revenue over that time period. However, if the goods or services are transferred to the customer at a point in time, then the seller recognizes the revenue at that point in time. Companies must determine whether the goods/services are transferred over time or as of a point in time at the Inception of the contract.

Goods or services are transferred over time if the seller meets any one of the following three criteria:

1. The customer receives and consumes the benefits of the goods or services simultaneously (for example, health club memberships and magazine subscriptions).

2. The customer controls the asset as the seller creates it or enhances it overtime (for example, software updates).

3. The asset the seller is creating does not have an alternative use to the seller, and the seller has an enforceable right to payment for the performance completed to date.

If a good or service is transferred over time, then the seller recognizes revenue over that same time period, based on the progress that it has made toward completion. However, if the seller does not have a reasonable way to measure its progress toward completion, then it should not recognize any revenue until it can reasonably estimate progress. Progress toward completion can be measured using either output methods or input methods. Examples of output methods include units produced or delivered, progress such as floors or miles completed, and time elapsed. Examples of input methods include labor hours expended, machine hours used, and costs incurred.

Example 8.17 illustrates transferring services over time because the customer receives and consumes the benefit simultaneously.

Example 8.18 illustrates a scenario in which the seller recognizes revenue over the service period and the contract meets the second criteria to recognize revenue. Here the customer controls the asset as the seller creates or enhances the item over time.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 393-394*

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Generative artificial intelligence is artificial intelligence capable of generating text, images, synthetic data, or other media, using generative models. Generative AI models learn the patterns and structure of their input training data and then generate new data that has similar characteristics. Generative AI has already seized the imagination of the consumer. The public release of models that can convert text to images or respond coherently to user prompts captivated and even startled many. As the Generative AI marketplace grows, consumers are increasingly exposed to Generative AI-enabled search, educational tools, and a range of free and paid services. For businesses in the consumer industry, Generative AI holds vast potential for improving and enhancing interactions, from helping consumers understand and find the products they need to accessing better, more real-time support to promoting brand loyalty. Among Generative AI’s exciting capabilities for the consumer industry is the ability to automatically create compelling content on demand and at scale. With Generative AIcreated text, images, marketing campaigns, product offerings, and more, businesses can hyper-personalize customer engagement across a multitude of markets and channels. There are also emerging opportunities for improving business operations and meeting enterprise goals. The rapid tempo of decision making in the consumer industry demands faster analysis of enterprise data, including structured information (e.g., sales) and unstructured information (e.g., customer feedback and design trends). Given the scale of the data, as well as the reality that data is sometimes siloed or geographically dispersed, Generative AI can help business users more rapidly and easily query datasets, find the right answers when they are needed, and understand their market at a level of granularity and speed that was previously unachievable. All of this moves toward improved decision-making that drives greater cost avoidance, labor efficiency, positive customer interactions, and measureable ROI. Today, Generative AI is beginning to be built into the technology solutions that run consumer businesses. As it becomes more accessible, companies will continue exploring the potential use cases and deployments that can drive topline and bottom-line benefits. Looking ahead, when Generative AI is combined with human oversight and governance, as well as other complementary technologies (e.g., traditional machine learning), it will likely sit at the core of consumer businesses ( https://www2.deloitte.com/content/dam/Deloitte/us/Documents/consulting/us-ai-institute-gen-ai-use-cases.pdf ).

In this video, once again, I just choose to do tiny laps in the breezeway of my apartment building. It is too wet and slippery out in the parking lot.

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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 123)

The father of modern accounting is Italian Franciscan Friar Luca Pacioli, who in 1494 first described the system of double-entry bookkeeping used by Venetian merchants in his Summa de Arithmetica, Geometria, Proportioni et Proportionalita. While he was not the inventor of accounting, Pacioli was the first to describe the system of debits and credits in journals and ledgers that is still the basis of today's accounting systems.

 Revenue Recognition (Part J)

by

Charles Lamson

Step 4: Allocate the Transaction Price to the Performance Obligations (continued from Part 122)

Recall from Exhibit 8.1 from Part 114 and reintroduced below, the five steps in revenue recognition. In this post, we discuss Step 4.

Standalone Selling Price Exceptions

Whereas the general rule is that the transaction price should be allocated to the performance obligations based on the relative standalone selling prices (discussed in Part 122), there are two possible exceptions.

• When the contract includes variable consideration.

• When the discount is not related to all of the contracts' performance obligations.

Related to the first exception, the seller should allocate variable consideration to one or more, but not all, performance obligations if two criteria are met:

1. The terms of the variable amount relate to one or more, but not all, of the specific performance obligations.

2. Allocating the variable amount entirely to one or more, but not all, of the specific performance obligations is consistent with the objective of performing the allocation in a way that reflects a reasonable allocation of the transaction price on the basis of the standalone selling prices.

Example 8.14 demonstrates a situation in which variable consideration is allocated entirely to one performance obligation. 

Example 8.15 illustrates a contract whose variable consideration cannot be allocated to just one performance obligation.

The second exception to the relative standalone selling price allocation method involves the allocation of a discount measured as the difference between the sum of the standalone selling prices and the transaction price. Typically, any discount should be allocated proportionately to the performance obligations based on the relative standalone selling prices. However, if an entity determines that the discount is not related to all of the performance obligations, it should allocate only the discount to the performance obligations to which it relates. Specifically, if the following three criteria are met, then the seller should allocate the discount to one or more, but not all, of the performance obligations.

1. The entity regularly sells the goods/services in the contract on a standalone basis.

2. The entity regularly sells a bundle of some of these goods/services at a discount to the sum of the standalone selling prices of the separate goods/services.

3. The discount in the bundle of goods/services described in (2) is basically the same as the discount in this contract.

Example 8.16 provides an illustration of a discount that is not proportionally allocated to the performance obligations (that is, the discount does not relate to all performance obligations).

Exhibit 8.5 provides a summary of allocating the transaction price.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 389-392*

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Going home tonight.

The diagnosis was not as bad as I thought. I'm going home tonight. The Rant shall continue tomorrow.

I have MRSA

 I just found out after a test that just came back that I have MRSA, so it looks like I will be staying in the hospital longer than I thought.  

I'll' keep you posted. Stay tuned.

Still in the hospital.

 Hey, everybody. I'm still in the hospital. I have hypotention. That's why I came in here.. I have very low blood pressure, and I am ery dizzy and tired all the time. They managed to get my blood pressure back to being somewhat normal.  Though, it was still a bit low, but now I'm it's starting to get very low again. So they're not going to let me go home quite yet until they get this figured out.

 I will keep you posted.

The Rnt will be on hiatus for the next few days due to illness..

Hey, everybody, The Rant will be on hiatus for the next few days due to illness. I'm in the hospital at the moment. it's nothing too serious.  I should be back home sometime this weekend, and The Rant will then resume.

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Accounting: The Language of Business - Vol. 2 (Intermediate: Part 122)

Some of the first accountants were employed around 300 BC in Iran, where tokens and bookkeeping scripts were discovered. Around the first millennium the Phoenicians invented an alphabetic system for bookkeeping, while the ancient Egyptians may have even assigned someone the role of comptroller.

 

Revenue Recognition (Part I)

by

Charles Lamson

Step 4: Allocate the Transaction Price to the Performance Obligations (continued from Part 121)

Recall from Exhibit 8.1 from Part 114 and reintroduced below, the five steps in revenue recognition. In this post, we discuss Step 4.

The next step in the revenue recognition process is allocating the transaction price determined in Step 3 (Parts 118, 119, 120, and 121) to the performance obligations determined in Step 2 (Part 117). If the determination from Step 2 is that there is only one performance obligation, then Step 4 is not required.

 

Standalone Selling Price

To allocate the transaction price, the entity first determines the standalone selling price of the goods or services related to each performance obligation. Then, if the sum of the standalone selling prices is higher than the transaction price, the seller typically allocates the discount to separate performance obligations on the basis of the relative standalone selling prices.

The standalone selling price of each performance obligation is the price the seller would charge for the same goods or services if it sold them on a standalone basis to similar customers under similar circumstances. Companies can often determine the standalone selling price using this method because they typically sell their goods or services on a standalone basis.

However, in practice the seller sometimes does not sell the same goods or services separately. In this case, the seller must estimate the standalone selling price. The authoritative literature does not stipulate an exact method but states that the company should use a method that maximizes the use of observable inputs. Whatever method the entity chooses for estimating the standalone selling price, it should use the same method consistently in similar circumstances.

Standalone Selling Price Estimation Methods

Although the authoritative literature does not specify a particular method, it does provide three suggestions suitable to determine a standalone selling price specific to a good or service: the adjusted market assessment approach, the expected-cost-plus-a-margin approach, and the residual approach. 

1. The adjusted market assessment approach focuses on the amount that the seller believes that customers are willing to pay for the good or service by evaluating the market. This approach might include using prices from the seller's competitors and adjusting those prices as necessary.

2. The expected-cost-plus-a-margin approach focuses on internal factors by forecasting the costs associated with providing the goods or services and adding an appropriate profit margin.

3. The residual approach allows an entity to estimate one or more, but not all, of the standalone selling prices and then allocate the remainder of the transaction price, or the residual amount, to the goods or services for which it does not have a standalone selling price estimate. 

Specifically, when using the residual approach, the entity estimates the residual standalone selling price by subtracting the standalone selling prices of the goods or services that underlie the other performance obligations from the total transaction price.

Once the entity has estimated all of the standalone selling prices, it allocates any discount (that is, any amount by which the sum of the standalone selling prices is higher than the transaction price) to separate performance obligations on the basis of relative standalone selling prices. In other words, the entity allocates the transaction price to each separate performance obligation based on the proportion of the standalone selling price of each performance obligation to the sum of the standalone selling prices of all of the performance obligations in the contract. Example 8.13 illustrates the three approaches. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 387-389*

end