Revenue, leases, and combinations
The Revenue Engine
Run the ASC 606 five steps: allocate by standalone price, constrain variable consideration, and time recognition by control transfer.
How the exam words it
- -The stem gives a bundle with standalone selling prices and asks how much price is allocated to one obligation or recognized in a period.
- -It gives a long-term contract with costs incurred and asks for revenue to date under the cost-to-cost method.
- -It describes a marketplace or reseller and asks whether revenue is gross or net.
- -It describes a warranty, a bonus, or a performed but unbilled obligation and asks for the accounting.
The playbook
- 1Allocate the transaction price to each distinct obligation in proportion to its relative standalone selling price.
- 2Estimate variable consideration by expected value or most-likely-amount, then constrain it to the amount for which a significant reversal is not probable.
- 3Recognize over time when one of the three criteria is met, measuring progress by cost-to-cost, otherwise recognize at the point control transfers.
- 4Record gross as a principal that controls the good, net as an agent, accrue an assurance warranty under ASC 460, and separate a contract asset from an unconditional receivable.
The trap
Recognizing a whole bundle on delivery when part is earned over time, or treating an assurance warranty as a separate obligation instead of a cost accrual.
How the exam varies it
The same pattern, re-skinned along these axes:
Which step: allocation, variable consideration, or timingPoint-in-time versus over-time recognitionPrincipal gross versus agent net, and contract asset versus receivable
Drill this pattern
8 questions of The Revenue Engine from across the AUD topics. Clear it by getting 5 right with a streak of 3.