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Question 20: In order to apply the series provision (that is, account for the arrangement as single performance obligation), does the accounting result need to be the same as if the underlying distinct goods or services each were accounted for as separate performance obligations?
Publication date: 31 Jan 2020
us FASB Staff Q&A Revenue 20
Reference(s): Section 606-10-25
Some stakeholders do not think that it would be appropriate to apply the series provision when it would result in a different pattern of revenue recognition for the single performance obligation than would result as compared to the pattern of revenue recognition that would result for the goods or services if they were each accounted for as separate performance obligations. Other stakeholders point out that the standard does not require the accounting result to be the same regardless of whether the arrangement was treated as a single performance obligation or as multiple performance obligations.
Consider the following example:
An entity contracts with a customer to perform a manufacturing service that results in the production of 10 widgets. The manufacturing service will be performed over a 3-year period. The contract price is CU100 million and the standalone selling price for each widget is CU10 million.
Total expected costs are anticipated to be CU80 million. The service the entity will provide to the customer in producing each widget is substantially the same, but the design is new, so the entity expects a decline in production costs over time. Production of the first five units is expected to cost CU9 million/widget. The costs to produce the other five widgets are expected to be CU7 million/widget.
For the purposes of this example, assume the entity determines that each service the entity will provide in producing 1 of the 10 widgets is distinct, meets the criteria to be satisfied over time, and that the same cost-based measure of progress would be used for each service the entity provides to produce 1 unit (thus, both of the series provision criteria in paragraph 606-10-25-15 are met). The following demonstrates the difference in accounting that results from concluding the series provision applies as compared to the accounting that would result if it was determined that the contract is for 10 separate performance obligations.
Series Provision (1PO)
| 10 Separate POs
| ||||
Total Contract
| Units 1–5
| Units 6–10
| Units 1–5
| Units 6–10
| |
Revenue
| 100
| 56
| 44
| 50
| 50
|
Costs
| 80
| 45
| 35
| 45
| 35
|
Margin
| 20
| 11
| 9
| 5
| 15
|
Although CU20 million in margin is recognized for the contract under both scenarios, there is a timing difference in terms of revenue recognition (and margin) because more revenue is recognized in relation to the service to produce the first 5 widgets (and less in relation to its service to produce the final 5 widgets) when the series is accounted for as a single performance obligation using a single measure of progress towards complete satisfaction.
The Board included two criteria in paragraph 606-10-25-15 to determine whether the series provision should be applied. Those criteria do not include a requirement to assess if applying the series provision would result in a different amount of revenue in a period than the amount of revenue in a period that would result from accounting for each unit as a separate performance obligation. Requiring an entity to compare recognition patterns in a “with and without” type manner would seem to be onerous and negate much of what the Board’s intent appears to have been in establishing the series provision. The basis for conclusions of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (paragraphs BC113 and BC114), explains that the purpose for including the series provision was, largely, to simplify an entity’s accounting and make it more operational. A requirement to have to prove whether application of the series provision results in a difference in the revenue recognition result would be counter to that objective.
Accordingly, the staff does not think application of the series provision requires an entity’s revenue recognition to be substantially the same with or without the series provision. Such a requirement would almost certainly make it more difficult for entities to meet the requirement, and because the series provision is not optional, it likely would require entities to undertake a “with and without” type analysis in a large number of circumstances to prove whether the series provision applies or not. Therefore, in the staff’s view, the series provision would apply to Example A because the fact pattern meets the criteria in paragraph 606-10-25-15, despite the difference in the timing of revenue recognition between the two conclusions (single performance obligation versus 10 separate performance obligations).
Copyright #year# by Financial Accounting Foundation, Norwalk, Connecticut.
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