Output methods measure progress toward satisfying a performance obligation based on results achieved and value transferred.
Excerpt from ASC 606-10-55-17
Output methods recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract.
Examples of output measures include surveys of work performed, units produced, units delivered, and contract milestones. Output methods directly measure performance and can be the most faithful representation of progress. It can be difficult to obtain directly observable information about the output of performance without incurring undue costs in some circumstances, in which case use of an input method might be necessary.
The measure selected should depict the reporting entity's performance to date, and should not exclude a material amount of goods or services for which control has transferred to the customer. Measuring progress based on units produced or units delivered, for example, might be a reasonable proxy for measuring the satisfaction of performance obligations in some, but not all, circumstances. These measures should not be used if they do not take into account work in process for which control has transferred to the customer.
A method based on units delivered could provide a reasonable proxy for the reporting entity's performance if the value of any work in process and the value of any units produced, but not yet transferred to the customer, is immaterial to both the contract and the financial statements as a whole at the end of the reporting period.
Measuring progress based on contract milestones is unlikely to be appropriate if there is significant performance between milestones. Material amounts of goods or services that are transferred between milestones should not be excluded from the reporting entity's measure of progress, even though the next milestone has not yet been met.
Question RR 6-3 addresses whether control can transfer at discrete points in time when a performance obligation is satisfied over time.
Question RR 6-3
Can control of a good or service transfer at discrete points in time when a performance obligation is satisfied over time?
Generally, no. Although the revenue standard cites milestones reached, units produced, and units delivered as examples of output methods, management should use caution in selecting these methods as they may not reflect the reporting entity’s progress in satisfying its performance obligations. Management will need to assess whether the measure of progress is correlated to performance and whether the reporting entity has transferred material goods or services that are not captured in the output measure. An appropriate measure of progress should not result in a reporting entity accumulating a material asset (such as work in process) as that would indicate that the measure does not reflect the reporting entity’s performance. Refer to US Revenue TRG Memo No. 53
and the related meeting minutes in Revenue TRG Memo No. 55
for further discussion of this topic.
Example RR 6-6 illustrates measuring progress toward satisfying a performance obligation using an output method.
EXAMPLE RR 6-6
Measuring progress – output method
Construction Co lays railroad track and enters into a contract with Railroad to replace a stretch of track for a fixed fee of $100,000. All work in process is the property of Railroad.
Construction Co has replaced 75 units of track of 100 total units of track to be replaced through year end. The effort required of Construction Co is consistent across each of the 100 units of track to be replaced.
Construction Co determines that the performance obligation is satisfied over time as Railroad controls the work in process asset being created.
How should Construction Co recognize revenue?
An output method using units of track replaced to measure Construction Co’s progress under the contract would appear to be most representative of services performed as the effort is consistent across each unit of track replaced. Additionally, this method appropriately depicts the reporting entity’s performance as all work in process for which control has transferred to the customer would be captured in this measure of progress. The progress toward completion is 75% (75 units/100 units), so Construction Co would recognize revenue equal to 75% of the total contract price, or $75,000.