The staff thinks an entity should consider all relevant facts and circumstances, including the inherent characteristics of the commodity, the contract terms, and information about infrastructure or other delivery mechanisms when evaluating whether a customer simultaneously receives and consumes the benefits of a commodity as the entity performs.

An evaluation of whether a commodity is simultaneously received and consumed is not limited to the inherent characteristics of the commodity. Rather, an entity should consider all known facts and circumstances relevant to the evaluation. For example, an entity may consider not only the inherent nature of the commodity, but also specific contract terms (for example, a continuous supply contract to meet immediate demands) and information about infrastructure or other delivery mechanisms (for example, a natural gas utility that delivers directly to residential consumers). As a result, revenue related to the sale of a commodity may or may not be recognized over time depending on whether the facts and circumstances of the contract indicate the customer will immediately receive and consume the benefits of the commodity.

The staff notes that consideration of factors other than the inherent nature of a commodity could result in revenue being recognized differently for sales of the same commodity. For example, an entity that provides natural gas for immediate consumption in a power plant may recognize revenue over time (that is, the natural gas is simultaneously received and consumed) while an entity that delivers natural gas into temporary storage for a similar power plant may recognize revenue at a point in time (that is, the natural gas is not simultaneously received and consumed).

The staff thinks an entity should consider all relevant facts and circumstances when evaluating the criteria in paragraph 606-10-25-27, and, therefore, when determining the nature of an entity’s promise to its customer, regardless of whether the contract is for the delivery of a commodity or a widget.

The staff thinks it is important to highlight that before evaluating the criteria in paragraph 606-10-25-27, an entity must first evaluate all relevant facts and circumstances to appropriately identify the overall nature of the entity’s promise(s) in a contract. For example, an entity may conclude that the nature of its promise in a contract to provide natural gas to a customer upon demand differs from the nature of its promise in a contract to deliver natural gas into a customer’s temporary storage. That is, an entity may determine that providing natural gas upon demand is a repetitive service arrangement (or potentially a stand-ready obligation to provide a commodity to a customer on an as-needed basis) while the delivery of natural gas into temporary storage is more akin to the delivery of a good. In some cases, this evaluation will require the use of significant judgment. Furthermore, the staff thinks that this view is most consistent with how facts and circumstances are considered in some other, very similar, circumstances (for example, the determining if multiple promised goods or services are distinct within the context of the contract) and that it may be inconsistent with other parts of Topic 606 to conclude that, in this one case, only some facts and circumstances (that many view as relevant to determining the nature of the entity’s promise) should be considered.

After an entity identifies the overall nature of its promise to the customer in a contract it is in the proper position to evaluate the guidance in paragraph 606-10-25-27, including whether a customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. When making this evaluation, an entity also must consider the related implementation guidance in paragraphs 606-10-55-5 through 55-6 pertaining to the criterion in paragraph 606-10-25-27(a).