Revenue, taxes, and leases
The Five-Step Split
Find the obligations, set the price, split it by standalone selling price, and recognize as each obligation is satisfied.
How the exam words it
- -The stem sells a bundle (software plus support, hardware plus service) and asks 'how much revenue is recognized on Day 1?'.
- -Consideration is variable, a bonus or penalty, and it asks 'what is the transaction price?' under most likely amount or expected value.
- -Customers can return goods and it asks how much revenue to recognize at the sale date.
- -One element has no observable SSP and the question points to 'the residual approach', or asks you to back into the total price from an allocation.
The playbook
- 1Identify the distinct performance obligations; a promise is distinct if the customer can benefit from it on its own.
- 2Set the transaction price: include variable consideration (expected value or most likely amount, constrained to what will not reverse) and net out expected returns.
- 3Allocate by relative standalone selling price, using residual only when an SSP is unobservable.
- 4Recognize at a point in time when control transfers, or over time ratably or by progress for services; cash received early is a contract liability.
The trap
Recognizing the full bundled price up front. Allocate by relative SSP and recognize each obligation separately as it is satisfied; undelivered services stay deferred.
How the exam varies it
The same pattern, re-skinned along these axes:
Single versus bundled obligationsFixed versus variable consideration, and which estimation methodPoint in time versus over time, forward computation versus backing into the total
Drill this pattern
8 questions of The Five-Step Split from across the AUD topics. Clear it by getting 5 right with a streak of 3.