Under the guidance in Topic 606, an entity recognizes revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. An entity will need to determine whether control transfers and, in turn, whether revenue is recognized at a point in time or over time. Step 5 of the revenue standard requires that an entity recognizes revenue over time if any one of the criteria in paragraph 606-10-25-27 is met. If none of the criteria are met, then an entity recognizes revenue at a point in time.

Because the principles in Topic 606 relate to the transfer of control, rather than risks and rewards under current GAAP, there will be cases in which an entity has a change upon adoption of the standard from recognizing revenue at a point in time to over time, and vice versa in some scenarios. One common scenario in which this change in timing may occur is in the contract manufacturing industry, which is not to say that all contracts in this industry are affected. However, in this industry it is common that the goods are customized and are customer specific. Therefore, there are cases in which the third over-time criterion is met, when there is also a right to payment for the goods. In its comment letter the AICPA’s Technical Issues Committee (TIC) noted that private companies may not have internal controls over contracting, including the ability to obtain legal determinations for contracts. Therefore, it may be difficult for private companies to determine if they have a right to payment for performance completed to date.

The staff would like to clarify that there is no requirement in Topic 606 that states that companies are required to consult with legal counsel for all revenue transactions. In that regard, the staff thinks it is helpful for companies to consider the Boards’ reasoning for including right to payment in the criterion in paragraph BC142 in Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). As noted in the basis for conclusions, the general notion is that if a company is creating a customized asset for a customer, then it will want to protect itself by requiring payment throughout the contract. The staff thinks that this analysis will typically be straightforward and should not require exhaustive analysis in most cases. Because the right to payment is assessed at the contract level, this analysis may be more complex in scenarios in which companies have non-standard terms or enter into transactions outside of their customary business practice. In that regard, the staff thinks that the discussion on this topic is very similar to the discussion on definition of a contract.

The staff understands that questions have arisen about how to handle contracts in circumstances in which the entity creates a good with no alternative use and the contract with its customer does not specify by its written terms the entity’s right to payment upon contract termination. Some stakeholders have asked whether it was the Board’s intent that companies analyze every law in every jurisdiction to determine whether there is recoverability. In the staff’s view, a reasonable interpretation of the guidance is that when a contract’s written terms do not specify the entity’s right to payment upon contract termination, an enforceable right to payment is presumed not to exist.