Some stakeholders have questioned whether an entity that is performing over time (that is, an entity that meets one of the criteria in paragraph 606-10-25-27) transfers control of a good or service underlying a performance obligation at discrete points in time.

Paragraph 606-10-25-27 includes criteria for determining whether an entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time. The staff thinks that meeting one of the criteria in that paragraph implies that control does not transfer at discrete points in time. Accordingly, an appropriate measure of progress should not result in a material asset that results from an entity’s performance (for example, work in process) being recognized by the entity.

The staff thinks that the guidance in paragraphs BC125, BC128, BC130, BC131, BC135, and BC142 of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), clarifies that when an entity meets any of the over-time criteria in paragraph 606-10-25-27, control does not transfer at discrete points in time and an appropriate measure of progress should not result in an entity recognizing a material asset that results from the entity’s performance (for example, work in process). However, the staff’s view does not imply that an entity would be prohibited from recognizing revenue over time merely because there is (or might be) a gap in an entity’s performance (that is, if the entity does not perform any activities towards satisfying the performance obligation in a particular financial reporting period).

The staff’s view is further supported by the guidance in paragraph 606-10-55-17. The staff thinks this guidance supports the concept underpinning the criteria in paragraph 606-10-25-27. That is, if any criterion is met, a customer would control the asset created by the entity’s performance.

The staff acknowledges that paragraph BC135 of Update 2014-09 states that a customer could be regarded as having control of an asset when an entity creates an asset that does not have an alternative use to the entity. However, the staff observes that the sentence following that acknowledgment clarifies that an entity also would need to consider whether a right to payment exists in order to conclude that a customer does in fact control the asset. Accordingly, the staff does not think paragraph BC135 implies that a customer does not necessarily control an asset when a performance obligation is satisfied over time. Rather, the staff thinks this paragraph implies that a customer may not have control of an asset with alternative use if an entity does not also have a right to payment.

The staff also observes that while Example 27, Withheld Payments on a Long-Term Contract, references milestone payments, it does not conclude that milestones are the appropriate measure of progress. Rather, the intent of Example 27 is to illustrate the application of the guidance on the existence of a significant financing component in a contract.

The staff acknowledges that, in some cases, an entity’s selected measure of progress may depict the pattern of an entity’s performance but may not perfectly match the entity’s performance. This might result in an immaterial asset (for example, work in process) being recognized.