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Carl Giardino Patrick Quinn For accounting purposes, the seller or provider of services in a contract recognizes revenue when the buyer takes control of the good or service. The timing of this event depends on the nature of the seller’s performance obligation, and
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Carl Giardino[/caption]
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Patrick Quinn[/caption]
For accounting purposes, the seller or provider of services in a contract recognizes revenue when the buyer takes control of the good or service. The timing of this event depends on the nature of the seller’s performance obligation, and whether control is transferred at a single point or over time.
When revenue is recognized over time, ASC Topic 606 provides that the seller transfers control as progress is made toward satisfying the performance obligation. Conversely, a partially complete project does not produce revenue recognition for tax purposes, unless certain services are “severable” under the terms of the contract.
As a result of the new standard, revenue recognition for financial reporting purposes will involve many scenarios where the timing of revenue recognition will be substantially different than previous guidance. For tax purposes, the timing for revenue recognition involving advance payments is governed by the all events test, which requires, in this case, recognition in the year of receipt.
A widely utilized exception authorizes conformity with the financial reporting methodology, so revenue can be deferred for tax purposes until the time it is recognized for financial reporting purposes (subject to terms and limitations).
Certain entities historically have been required to treat bundled contracts of goods and services as a single unit of account under accepted accounting principles, unless specific conditions were met to permit delineation of the contract into its separate elements. In some industries, the conditions required a determination of vendor-specific objective evidence of fair value to enable the separation of the amount and timing of revenue recognition for each element of the contract. Under the new standard, all entities with bundled contracts must allocate consideration among separate performance obligations. Services must be bundled together until they represent a distinct performance obligation. The amount of consideration for each performance obligation would then be determined based on the company’s stand-alone selling prices for such products.
Inconsistencies may arise between accounting and tax reporting for bundled goods and services. The allocation performed for tax purposes defers to the prices for separate elements stated specifically in the contract, which may not be consistent with the dynamic of identified performance obligations or the seller’s stand-alone selling prices associated with those obligations.
The new revenue recognition standards specify there must be a probable chance of collection to recognize any amount of revenue as a threshold matter. Arrangements deemed uncollectible at the beginning of the contract will not default to cash basis recognition; entities will continually reassess the arrangements to determine whether consideration will be collectible later.
Prior to meeting the collectibility requirement, an entity can recognize revenue in the amount of consideration received when:
• The entity has transferred control of the goods or services.
• The entity has stopped transferring goods or services and has no obligation under the contract to transfer additional goods or services.
• The entity has received nonrefundable consideration from the customer.
In comparison, the tax rules narrowly define a “doubtful collectibility” exception to revenue recognition that may not dovetail with the collectibility standard and the new financial reporting concepts governing revenue recognition when collection is not probable. Revenue may therefore be recognizable for tax purposes even though it fails to be collectible under the new financial reporting standards.
Carl Giardino is a managing director in the Tax Group at CBIZ Tofias. Patrick Quinn is a shareholder in the Accounting and Auditing Group at CBIZ Tofias.
Editor’s note: The third and final part of this series will appear next week.
