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6.5 Performance obligations satisfied at a point in time
Publication date: 31 Oct 2022
us Revenue guide
A performance obligation is satisfied at a point in time if none of the criteria for satisfying a performance obligation over time are met. The guidance on control (see RR 6.2) should be considered to determine when the performance obligation is satisfied by transferring control of the good or service to the customer. In addition, the revenue standard provides five indicators that a customer has obtained control of an asset:
- The entity has a present right to payment.
- The customer has legal title.
- The customer has physical possession.
- The customer has the significant risks and rewards of ownership.
- The customer has accepted the asset.
This is a list of indicators, not criteria. Not all of the indicators need to be met for management to conclude that control has transferred and revenue can be recognized. Management needs to use judgment to determine whether the factors collectively indicate that the customer has obtained control. This assessment should be focused primarily on the customer's perspective.
6.5.1 Entity has a present right to payment
A customer's present obligation to pay could indicate that the reporting entity has transferred the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset.
6.5.2 Customer has legal title
A party that has legal title is typically the party that can direct the use of and receive the benefits from an asset. The benefits of holding legal title include the ability to sell an asset, exchange it for another good or service, or use it to secure or settle debt, which indicates that the holder has control.
A reporting entity that has not transferred legal title, however, might have transferred control in certain situations. A reporting entity could retain legal title as a protective right, such as to secure payment. Legal title retained solely for payment protection does not indicate that the customer has not obtained control. All indicators of transfer of control should be considered in these situations.
Example RR 6-12 illustrates retention of legal title as a protective right.
EXAMPLE RR 6-12
Recognizing revenue – legal title retained as a protective right
Equipment Dealer enters into a contract to deliver construction equipment to Landscaping Inc. Equipment Dealer operates in a country where it is common to retain title to construction equipment and other heavy machinery as protection against nonpayment by a buyer. Equipment Dealer's normal practice is to retain title to the equipment until the buyer pays for it in full. Retaining title enables Equipment Dealer to more easily recover the equipment if the buyer defaults on payment.
Equipment Dealer concludes that there is one performance obligation in the contract that is satisfied at a point in time when control transfers. Landscaping Inc has the ability to use the equipment and move it between various work locations once it is delivered. Normal payment and credit terms apply.
When should Equipment Dealer recognize revenue for the sale of the equipment?
Analysis
Equipment Dealer should recognize revenue upon delivery of the equipment to Landscaping Inc because control has transferred. Landscaping Inc has the ability to direct the use of and receive benefits from the equipment, which indicates that control has transferred. Equipment Dealer's retention of legal title until it receives payment does not change the substance of the transaction.
6.5.3 Customer has physical possession
Physical possession of an asset typically gives the holder the ability to direct the use of and obtain benefits from that asset, and is therefore an indicator of which party controls the asset. However, physical possession does not, on its own, determine which party has control. Management needs to carefully consider the facts and circumstances of each arrangement to determine whether physical possession coincides with the transfer of control.
Example RR 6-13 illustrates a fact pattern in which a customer has physical possession, but does not have control of an asset.
EXAMPLE RR 6-13
Recognizing revenue — sale of goods with resale restrictions
Publisher ships copies of a new book to Retailer. Publisher has a present right to payment for the books, but its terms of sale restrict Retailer’s right to resell the book for several weeks to ensure a consistent release date across all retailers.
Can Publisher recognize revenue upon delivery of the books to Retailer?
Analysis
It depends. Publisher will need to assess whether Retailer has the ability to direct the use of and receive the benefit from the books. Generally, we expect Publisher will conclude that Retailer does not control the books until the resale restriction lapses and Retailer can sell the book. Thus, Publisher would not recognize revenue until the restriction lapses.
Publisher should consider all relevant facts and circumstances to determine when control of the books transfers to the Retailer. For example, if Retailer is restricted from selling the books to consumers but could sell them to another distributor, with the restrictions on resale to consumers, this might indicate Retailer has the ability to direct the use of and receive the benefit from the books; that is, Publisher might conclude in this fact pattern that Retailer has obtained control of the books.
6.5.4 Customer has significant risks and rewards of ownership
A reporting entity that has transferred risks and rewards of ownership of an asset has typically transferred control to a customer, but not in all cases. Management will need to apply judgment to determine whether control has transferred in the event the seller has retained some of the risks or rewards.
Retained risks could result in separate performance obligations in some fact patterns. This would require management to allocate some of the transaction price to the additional obligation. Management should exclude any risks that give rise to a separate performance obligation when evaluating the risks and rewards of ownership.
Question RR 6-6
Can control of a good transfer prior to delivery to the customer’s location if a reporting entity has a customary practice of replacing or crediting the customer for lost or damaged goods in transit?
Can control of a good transfer prior to delivery to the customer’s location if a reporting entity has a customary practice of replacing or crediting the customer for lost or damaged goods in transit?
PwC response
It depends. Management would need to determine when the customer obtains control of the good considering the definition of control as well as the five indicators. The fact that the reporting entity has a practice of replacing lost or damaged goods in transit is not determinative, on its own. If the reporting entity concludes control transfers at shipping point in this fact pattern, it should consider whether there is an additional performance obligation or guarantee related to the goods while in transit.
6.5.5 Customer has accepted the asset
A customer acceptance clause provides protection to a customer by allowing it to either cancel a contract or force a seller to take corrective actions if goods or services do not meet the requirements in the contract. Judgment can be required to determine when control of a good or service transfers if a contract includes a customer acceptance clause.
Customer acceptance that is only a formality does not affect the assessment of whether control has transferred. An acceptance clause that is contingent upon the goods meeting certain objective specifications could be a formality if the reporting entity has performed tests to ensure those specifications are met before the good is shipped. Management should consider whether the reporting entity routinely manufactures and ships products of a similar nature, and the reporting entity's history of customer acceptance upon receipt of products. The acceptance clause might not be a formality if the product being shipped is unique, as there is no history to rely upon.
An acceptance clause that relates primarily to subjective specifications is not likely a formality because the reporting entity cannot ensure the specifications are met prior to shipment. Management might not be able to conclude that control has transferred to the customer until the customer accepts the goods in such cases. A customer also does not control products received for a trial period if it is not committed to pay any consideration until it has accepted the products. This accounting differs from a right of return, as discussed in RR 8.2, which is considered in determining the transaction price.
Customer acceptance, as with all indicators of transfer of control, should be viewed from the customer's perspective. Management should consider not only whether it believes the acceptance is a formality, but also whether the customer views the acceptance as a formality.
Question RR 6-7
The payment terms for a contract to sell a product to a customer specify that the final 10% of the fee is not due until the customer accepts the product. Control of the product transfers at a point in time and there are no other performance obligations in the contract. Do these payment terms indicate that control of the product does not transfer until customer acceptance?
The payment terms for a contract to sell a product to a customer specify that the final 10% of the fee is not due until the customer accepts the product. Control of the product transfers at a point in time and there are no other performance obligations in the contract. Do these payment terms indicate that control of the product does not transfer until customer acceptance?
PwC response
It depends. Payment terms alone are not determinative in the assessment of when control transfers to the customer. Management would need to assess the substance of the acceptance provision, including whether the acceptance relates to objective or subjective specifications, and consider the other indicators of control transfer discussed in RR 6.5. The total transaction price should be recognized at the point in time control of the product transfers to the customer; that is, it would not be appropriate to recognize 90% of the transaction price prior to acceptance and the final 10% upon acceptance.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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