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Question 9: How should an entity assess collectibility for a portfolio of contracts?
Publication date: 31 Jan 2020
us FASB Staff Q&A Revenue 9
Reference(s): Section 606-10-25
The question relates to how an entity should apply Step 1 (Identify the Contract) to contracts in which the entity has historical experience that it will not collect consideration from some customers in a portfolio of contracts.
Consider the following example:
An entity has a large volume of homogenous revenue generating customer contracts for which billings are done in arrears on a monthly basis. Before accepting a customer, the entity performs procedures designed to ensure that it is probable that the customer will pay the amounts owed. If these procedures result in the entity concluding that it is not probable that the customer will pay the amounts owed, the entity does not accept them as a customer. Because these procedures are only designed to determine whether collection is probable (and thus not a certainty), the entity anticipates that it will have some customers that will not pay all amounts owed. While the entity collects the entire amount due from the vast majority of its customers, on average, the entity’s historical evidence (which is representative of its expectations for the future) indicates that the entity will only collect 98% of the amounts billed.
If the entity in the example above bills CU100 to its customers in a particular month and there are no other issues that would preclude recognition of revenue for that amount in the month it is billed, how much revenue should the entity recognize given that historical evidence indicates that it will collect only 98% of amounts billed? For purposes of this example assume that the entity has satisfied its performance obligations as of the billing date. The question is whether the entity should recognize revenue of CU100 or CU98 in this example.
Paragraph 606-10-25-1 provides criteria that a customer contract must meet in Step 1 of Topic 606, including an assessment of the probability of collection, before the remaining steps of Topic 606 can be applied. Specifically, paragraph 606-10-25-1(e) includes the criterion on collectibility. If any of the criteria in paragraph 606-10-25-1 are not met, revenue is not recognized until specified events have occurred, as described in paragraph 606-10-25-7.
In the example above, because the entity concluded as a result of its procedures (around the acceptance of new customers) that it is probable the customers will pay the amounts owed, the contracts meet the collectibility threshold in Step 1 of Topic 606. When the entity satisfies the performance obligations in the contracts, it would recognize revenue of CU100 and a corresponding receivable representing its right to consideration that is unconditional. The guidance in Topic 606 would not support the view that revenue of only CU98 should be recognized in this example because the entity concluded that it is probable that the customer will pay the amount to which the entity will be entitled of CU100.
The entity would evaluate the receivable for impairment as described in paragraph 606-10-45-4.
Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.
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