Add to favorites
Once management determines that a performance obligation is satisfied over time, it must measure its progress toward completion to determine the timing of revenue recognition.

ASC 606-10-25-31

For each performance obligation satisfied over time…, an entity shall recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity's performance in transferring control of goods or services promised to a customer (that is, satisfaction of an entity's performance obligation).

The purpose of measuring progress toward satisfaction of a performance obligation is to recognize revenue in a pattern that reflects the transfer of control of the promised good or service to the customer. Management can employ various methods for measuring progress, but should select the method that best depicts the transfer of control of goods or services.
Methods for measuring progress include:
  • Output methods, that recognize revenue based on direct measurements of the value transferred to the customer
  • Input methods, that recognize revenue based on the reporting entity's efforts to satisfy the performance obligation
Each of these methods has advantages and disadvantages, which should be considered in determining which is the most appropriate in a particular arrangement. The method selected for measuring progress toward completion should be consistently applied to arrangements with similar performance obligations and similar circumstances.
Circumstances affecting the measurement of progress often change for performance obligations satisfied over time, such as a reporting entity incurring more costs than expected. Management should update its measure of progress and the revenue recognized to date as a change in estimate when circumstances change to accurately depict the reporting entity's performance completed to date.
The boards noted in the basis for conclusions to the revenue standard that selection of a method is not simply an accounting policy election. Management should select the method of measuring progress that best depicts the transfer of goods or services to the customer.

Excerpt from ASU 2014-09 BC159

That does not mean that an entity has a “free choice.” The guidance states that an entity should select a method of measuring progress that is consistent with the clearly stated objective of depicting the entity's performance—that is, the satisfaction of an entity's performance obligation in transferring control of goods or services to the customer.

6.4.1 Output methods

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?
PwC response
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?
Analysis
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.

6.4.1.1 "Right to invoice" practical expedient

Management can elect a practical expedient to recognize revenue based on amounts invoiced to the customer in certain circumstances.

Excerpt from ASC 606-10-55-18

As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice.

Evaluating whether a reporting entity’s right to consideration corresponds directly with the value transferred to the customer will require judgment. Management should not presume that a negotiated payment schedule automatically implies that the invoiced amounts represent the value transferred to the customer. The market prices or standalone selling prices of the goods or services could be evidence of the value to the customer; however, other evidence could also be used to demonstrate that the amount invoiced corresponds directly with the value transferred to the customer. Refer to Revenue TRG Memo No. 40 and the related meeting minutes in Revenue TRG Memo No. 44  for further discussion of this topic.
The revenue standard refers to an example of a “fixed amount for each hour of service,” but this does not preclude application of the practical expedient to contracts with pricing that varies over the term of the contract. Reporting entities will need sufficient evidence that the variable pricing reflects “value to the customer” throughout the contract.
Consider a contract to provide electricity to a customer for a three-year period at rates that increase over the contract term. The reporting entity might conclude that the increasing rates reflect “value to the customer” if, for example, the rates reflect the forward market price of electricity at contract inception. In contrast, consider an arrangement to provide monthly payroll processing services with a payment schedule requiring lower monthly payments during the first part of the contract and higher payments later in the contract because of the customer’s short-term cash flow requirements. In this case, the increasing rates do not reflect “value to the customer.”
Other payment streams within a contract could affect a reporting entity’s ability to elect the practical expedient. For example, the presence of an upfront payment (or back-end rebate) in a contract may indicate that the amounts invoiced do not reflect value to the customer for the reporting entity’s performance completed to date. Management should consider the nature of such payments and their size relative to the total arrangement.
Reporting entities electing the “right to invoice” practical expedient can also elect to exclude certain disclosures about the remaining performance obligations in the contract. Refer to FSP 33.4 for further discussion of the disclosure requirements.
Question RR 6-4 addresses whether a reporting entity can use the “right to invoice” practical expedient when a contract includes escalating fees.
Question RR 6-4
A reporting entity enters into a four-year, noncancellable service contract with a customer that includes a series of distinct services. The contractual pricing increases 10% annually. Can the reporting entity use the “right to invoice” practical expedient and record revenue based on the contractual pricing each year?
PwC response
It depends. Management will need to assess whether the requirements to apply the practical expedient are met. In order to use the practical expedient, the escalating fees in the contract need to correspond directly with the value to the customer of the reporting entity’s performance (that is, the value of the services in the second year are 10% higher than the value of the services in the first year). Management should consider factors such as the business reasons for the escalating fees and expected pricing of the services in future years. If the scheduled price increases in the contract do not correspond directly with the increase in value to the customer of the reporting entity’s performance, management will not be able to elect the practical expedient and will need to determine another appropriate measure of progress. For example, it may be appropriate to use a time-based measure of progress (that is, straight-line recognition). A time-based measure of progress would result in recognition of the total transaction price ratably over the four-year period.

6.4.2 Input methods

Input methods measure progress toward satisfying a performance obligation indirectly.

Excerpt from ASC 606-10-55-20

Input methods recognize revenue on the basis of the entity's efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation.

Input methods measure progress based on resources consumed or efforts expended relative to total resources expected to be consumed or total efforts expected to be expended. Examples of input methods include costs incurred, labor hours expended, machine hours used, time lapsed, and quantities of materials.
Judgment is needed to determine which input measure is most indicative of performance, as well as which inputs should be included or excluded. A reporting entity using an input measure should include only those inputs that depict the reporting entity's performance toward satisfying a performance obligation. Inputs that do not reflect performance should be excluded from the measure of progress.
Management should exclude from its measure of progress any costs incurred that do not result in the transfer of control of a good or service to a customer. For example, mobilization or set-up costs, while necessary for a reporting entity to be able to perform under a contract, might not transfer any goods or services to the customer. Management should consider whether such costs should be capitalized as a fulfillment cost as discussed in RR 11.

6.4.2.1 Input methods based on cost incurred

One common input method uses costs incurred relative to total estimated costs to determine the extent of progress toward completion. It is often referred to as the “cost-to-cost” method.
Costs that might be included in measuring progress in the “cost-to-cost” method if they represent progress under the contract include:
  • Direct labor
  • Direct materials
  • Subcontractor costs
  • Allocations of costs related directly to contract activities if those depict the transfer of control to the customer
  • Costs explicitly chargeable to the customer under the contract
  • Other costs incurred solely due to the contract
Some items included in the “cost-to-cost” method, such as direct labor and materials costs, are easily identifiable. It can be more challenging to determine if other types of costs should be included, for example insurance, depreciation, and other overhead costs. Management needs to ensure that any cost allocations include only those costs that contribute to the transfer of control of the good or service to the customer.
Costs that are not related to the contract or that do not contribute toward satisfying a performance obligation are not included in measuring progress. Examples of costs that do not depict progress in satisfying a performance obligation include:
  • General and administrative costs that are not directly related to the contract (unless explicitly chargeable to the customer under the contract)
  • Selling and marketing costs
  • Research and development costs that are not specific to the contract
  • Depreciation of idle plant and equipment
These costs are general operating costs of a reporting entity, not costs to progress a contract toward completion.
Other costs that do not depict progress, unless they are planned or budgeted when negotiating the contract, are excluded from the ‘cost-to-cost’ method. This will include costs of wasted materials, labor and other resources that represent inefficiencies in the entity’s performance, rather than progress in transferring control of a good or service.
Example RR 6-7 illustrates measuring progress toward satisfying a performance obligation using an input method.
EXAMPLE RR 6-7

Measuring progress – “cost-to-cost” method
Contractor enters into a contract with Government to build an aircraft carrier for a fixed price of $4 billion. The contract contains a single performance obligation that is satisfied over time.
Additional contract characteristics are:
• Total estimated contract costs are $3.6 billion, excluding costs related to wasted labor and materials.
• Costs incurred in year one are $740 million, including $20 million of wasted labor and materials.
Contractor concludes that the performance obligation is satisfied over time as Government controls the aircraft carrier as it is created. Contractor also concludes that an input method using costs incurred to total cost expected to be incurred is an appropriate measure of progress toward satisfying the performance obligation.
How much revenue and cost should Contractor recognize as of the end of year one?
Analysis
Contractor would recognize revenue of $800 million based on a calculation of costs incurred relative to the total expected costs. Contractor would recognize revenue as follows ($ million):
Total transaction price
$
4,000
Progress toward completion
20% ($720 / $3,600)
Revenue recognized
$
800
Cost recognized
$
740
Gross profit
$
60
Wasted labor and materials of $20 million should be excluded from the calculation, as the costs do not represent progress toward completion of the aircraft carrier.

6.4.2.2 Uninstalled materials

Uninstalled materials are materials acquired by a contractor that will be used to satisfy its performance obligations in a contract for which the cost incurred does not depict transfer to the customer. The cost of uninstalled materials should be excluded from measuring progress toward satisfying a performance obligation if the reporting entity is only providing a procurement service. A faithful depiction of a reporting entity's performance might be to recognize revenue equal to the cost of the uninstalled materials if all of the following conditions are met:

Excerpt from ASC 606-10-55-21(b)

  1. The good is not distinct.
  2. The customer is expected to obtain control of the good significantly before receiving services related to the good.
  3. The cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation.
  4. The entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal…)

Example RR 6-8 illustrates accounting for an arrangement that includes uninstalled materials. This concept is also illustrated in Example 19 of the revenue standard (ASC 606-10-55-187 through ASC 606-10-55-192).
EXAMPLE RR 6-8

Measuring progress – uninstalled materials
Contractor enters into a contract to build a power plant for UtilityCo. The contract specifies a particular type of turbine to be procured and installed in the plant. The contract price is $200 million. Contractor estimates that the total costs to build the plant are $160 million, including costs of $50 million for the turbine.
Contractor procures and obtains control of the turbine and delivers it to the building site. UtilityCo has control over any work in process. Contractor has determined that the contract is one performance obligation that is satisfied over time as the power plant is constructed, and that it is the principal in the arrangement (as discussed in RR 10).
How much revenue should Contractor recognize upon delivery of the turbine?
Analysis
Contractor would recognize revenue of $50 million and costs of $50 million when the turbine is delivered. Contractor has retained the risks associated with installing the turbine as part of the construction project. UtilityCo has obtained control of the turbine because it controls work in process, and the turbine's cost is significant relative to the total expected contract costs. Contractor was not involved in designing and manufacturing the turbine and therefore concludes that including the costs in the measure of progress would overstate the extent of its performance. The turbine is an uninstalled material and Contractor would therefore only recognize revenue equal to the cost of the turbine.

6.4.2.3 Learning curve

Learning curve is the effect of gaining efficiencies over time as a reporting entity performs a task or manufactures a product. When a reporting entity becomes more efficient over time in an arrangement that contains a single performance obligation satisfied over time, a reporting entity could select a method of measuring progress (such as a cost-to-cost method) that results in recognizing more revenue and expense in the earlier phases of the contract.

For example, if a reporting entity has a single performance obligation to process transactions for a customer over a five-year period, the reporting entity might recognize more revenue and expense for the earlier transactions processed relative to the later transactions if it incurs greater costs in the earlier periods due to the effect of the learning curve. Refer to RR 11.3.2 for further discussion on the accounting for learning curve costs.

6.4.3 Time-based methods

Time-based methods to measure progress might be appropriate in situations when a performance obligation is satisfied evenly over a period of time or the reporting entity has a stand-ready obligation to perform over a period of time. Judgment will be needed to determine the appropriate method to measure progress toward satisfaction of a stand-ready obligation. It is not appropriate to default to straight-line attribution; however, straight-line recognition over the contract period will be reasonable in many cases. Examples include a contract to provide technical support related to a product sold to customers or a contract to provide a customer membership to a health club. This concept is illustrated in Example 18 of the revenue standard (ASC 606-10-55-184 through ASC 606-10-55-186).
Judgment is required to determine whether the nature of a reporting entity’s promise is to stand ready to provide goods or services or a promise to provide specified goods or services. For example, a promise to provide one or more specified upgrades to a software license is not a stand-ready performance obligation. A contract to deliver unspecified upgrades on a when-and-if-available basis, however, would typically be a stand-ready performance obligation. This is because the customer benefits evenly throughout the contract period from the guarantee that any updates or upgrades developed by the reporting entity during the period will be made available. Refer to Revenue TRG Memo No. 16 and the related meeting minutes in Revenue TRG Memo No. 25 for further discussion of this topic.
A measure of progress based on delivery or usage (rather than a time-based method) will best reflect the reporting entity’s performance in some instances. For example, a promise to provide a fixed quantity of a good or service (when the quantity of remaining goods or services to be provided diminishes with customer usage) is typically a promise to deliver the underlying good or service rather than a promise to stand ready. In contrast, a contract that contains a promise to deliver an unlimited quantity of a good or service might be a stand-ready obligation for which a time-based measure of progress is appropriate.
Example RR 6-9 and Example RR 6-10 illustrate the assessment of whether a time-based method is appropriate for measuring progress toward satisfying a performance obligation.
EXAMPLE RR 6-9

Measuring progress – stand-ready obligation
SoftwareCo enters into a contract with a customer to provide a software license and unlimited access to its call center for a one-year period. SoftwareCo determines that the software license and support services are separate performance obligations. Customers typically utilize the call center throughout the one-year term of the contract.

How should SoftwareCo recognize revenue for the unlimited support services?
Analysis
SoftwareCo would conclude its promise to the customer is a stand-ready obligation to provide unlimited access to its call center. SoftwareCo would then determine a measure of progress that best reflects its performance in satisfying this obligation. Assuming a time-based measure, SoftwareCo would recognize revenue for the support services on a straight-line basis over the one-year service period.
EXAMPLE RR 6-10

Measuring progress – obligation to provide a specified quantity of services
SoftwareCo enters into a contract with a customer to provide a software license and 100 hours of call center support for a one-year period. SoftwareCo determines that the software license and support services are separate performance obligations. SoftwareCo monitors customer usage of support hours to determine when the hours have been utilized. Customers are charged an additional fee for call center usage beyond 100 hours. Customers frequently use more than 100 hours of support.
How should SoftwareCo recognize revenue for the 100 hours of support services?
Analysis
SoftwareCo would conclude that its promise to the customer is to provide 100 hours of call center support. SoftwareCo would then determine an output method. Assuming a conclusion that hours of service provided best reflects its efforts in satisfying the performance obligation, revenue would be recognized based on the customer’s usage of the support services.

6.4.4 Inability to estimate progress

Circumstances can exist where a reporting entity is not able to reasonably determine the outcome of a performance obligation or its progress toward satisfaction of that obligation. It is appropriate in these situations to recognize revenue over time as the work is performed, but only to the extent of costs incurred (that is, with no profit recognized) as long as the reporting entity expects to at least recover its costs.
Management should discontinue this practice once it has better information and can estimate a reasonable measure of performance. A cumulative catch-up adjustment should be recognized in the period of the change in estimate to recognize revenue related to prior performance that had not been recognized due to the inability to measure progress.

6.4.5 Progress when multiple items form a single performance obligation

A single performance obligation could contain a bundle of goods or services that are not distinct. The guidance requires that reporting entities apply a single method to measure progress for each performance obligation satisfied over time.
It could be challenging to identify a single method to measure progress that reflects the reporting entity’s performance, particularly when the individual goods or services included in the single performance obligation will be transferred over different periods of time. A reporting entity should consider the nature of its overall promise for the performance obligation to determine the appropriate measure of progress. In making this assessment, a reporting entity should consider the rationale for combining the individual goods or services into a single performance obligation. Refer to Revenue TRG Memo No. 41 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion of this topic.
For contracts that include multiple payment streams, such as upfront payments, contingent performance bonuses, and reimbursement of out-of-pocket expenses, reporting entities should apply a single measure of progress to each performance obligation satisfied over time to recognize revenue. That is, all payment streams should be included in the total transaction price and recognized according to the identified measure of progress, regardless of the timing of payment. For example, an upfront payment should not be amortized on a straight-line, time-elapsed basis if another measure, such as costs incurred, labor hours, or units produced, is used to measure progress for the related performance obligation. Refer to RR 8.4 for further discussion of upfront payments.

6.4.6 Partially satisfied performance obligations

Reporting entities sometimes commence activities on a specific anticipated contract before finalizing the contract with the customer or meeting the contract criteria (refer to RR 2.6.1). At the date the contract criteria are met, a reporting entity should recognize revenue for any promised goods or services that have already been transferred (that is, revenue should be recognized on a cumulative catch-up basis). Refer to Revenue TRG Memo No. 33 and the related meeting minutes in Revenue TRG Memo No. 34 for further discussion of this topic.
Example RR 6-11 illustrates the accounting for a performance obligation that is partially satisfied prior to obtaining a contract with a customer.
EXAMPLE RR 6-11
Measuring progress – partial satisfaction of performance obligations prior to obtaining a contract
Manufacturer enters into a long-term contract with a customer to manufacture a highly customized good. The customer issues purchase orders for 60 days of supply on a rolling calendar basis (that is, every 60 days a new purchase order is issued). Purchase orders are non-cancellable and Manufacturer has a contractual right to payment for all work in process for goods once an order is received.
Manufacturer pre-assembles some goods in order to meet the anticipated demand from the customer based on a non-binding forecast provided by the customer. At the time the customer issues a purchase order, Manufacturer typically has some goods on hand that are completed and others that are partially completed. Manufacturer has determined that each customized good represents a performance obligation satisfied over time. That is, the customized goods have no alternative use and Manufacturer has an enforceable right to payment once it receives the purchase order.
On January 1, 20X1, Manufacturer receives a purchase order from the customer for 100 goods. At that time, Manufacturer has completed 30 of the goods and partially completed 20 goods based on the forecast previously provided by the customer. Manufacturer determines that the 20 partially completed goods are 50% complete based on a cost-to-cost input method of measuring progress. The transaction price is $200 per unit and the contract includes no other promised goods or services.
How should Manufacturer account for its progress completed to date when it receives the purchase order from the customer?
Analysis
The contract criteria are met when Manufacturer receives the purchase order. On that date, Manufacturer should recognize revenue for any promised goods or services already transferred. Manufacturer should recognize $8,000 of revenue for performance satisfied to date ((30 completed units * $200) + (20 partially completed units * $100)) because the performance obligation is satisfied over time as the goods are assembled.
Expand

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

Your session has expired

Please use the button below to sign in again.
If this problem persists please contact support.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide