Definitions
A binding agreement between two or more parties that creates enforceable rights and obligations for goods and services
Contract
Heating Inc entered into a contract to deliver and install 5 furnaces. These furnaces come with a 1-year warranty. How many performance obligations does Heating Inc likely have?
3 (Delivery, Installation, Warranty)
A change in the scope, price (or both) of a contract that has been approved by both parties
Contract modification
A promise to transfer a good or service
Performance obligation
FreshBrew Coffee sells a gift card for $50. Revenue is recognized when the card is redeemed. What do they credit at the time of sale?
Contract liability / Deferred revenue
Revenue is adjusted for this when there's a significant gap between payment and delivery of goods/services.
The financing component (time value of money)
This is created when a company delivers goods or services but has not yet billed or collected payment.
Contract asset
GadgetCo sells a package that includes a tablet and a one-year subscription to its streaming service for $600. The stand-alone selling price of the tablet is $500, and the subscription is $200. How much of the $600 should be allocated to the subscription?
$171 ([$200 ÷ ($500 + $200)] × $600)
Company Z has a contract with variable consideration. The contract price is $10,000 with a possible $2,000 bonus if they are able to fulfill their performance obligations in 3 months. Company Z estimates there is a 50% chance they are able to do it. Using the expected value method what would the estimate be to predict their compensation.
$11,000 (10,000 x 0.5) + (12,000 x 0.5)