CASE STUDY REVENUE RECOGNITION 1

Case Study Revenue Recognition

Johnathon Mackin

American Military University

CASE STUDY REVENUE RECOGNITION 2

Abstract

The following is a case study in two dimensions. Transaction 1 and 2 deals with revenue

recognition as applicable to ASA 606 and the five-step model as well as IFRS 15. There is

convergence in these areas, and both retain the same wording and focus in revenue recognition.

Although the dimensions of the cases differ ASA 606 and IFRS 15 are still applicable. The

offer, agreement and the consideration are applicable. My conclusion is that in transaction 1 the

five areas for revenue recognition are satisfied. While in transaction 2 the elements for revenue

recognition are also satisfied.

Keywords: ASA 606, IFRS 15, Revenue Recognition

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Introduction of Revenue Recognition

Revenue recognition is codified in ASC 606 and IFRS 15. These standards are

convergent as far as United States Generally Accepted Accounting Principles and International

Financial Reporting Standards. They focus upon 5 areas almost word for word in the

publications: “identify the contract with a customer,  , determine the transaction price, allocate

the transaction price to the performance obligations in the contract,   recognize revenue when the

entity satisfies a performance obligation.” (International Financial Regulatory Standard, 2018)

Transaction 1 Case Study

Is it appropriate for CoAx to recognize revenue associated with Transaction 1 before the

date on which CableCo takes delivery of the 1,000 feet of 18 AWG coaxial cable? In my opinion

and from reading IFRS 15 and ASC 606 revenue recognition is appropriate and even required by

CoAx. The hurdle and decision that must be made here is if the customer took physical control of

the product. The answer is no but they took legal control by asking CoAx “to store their

material” until the customers warehouse was constructed. That is control. That is taking

ownership of material.

Transaction 2 Case Study

Is it appropriate to recognize revenue upon transfer of the inventory to the carrier in

Transaction 2? I believe that revenue recognition is appropriate in this situation. First, the

contract is Freight on Board (FOB) origin and title passes to customer once the carrier picks up

the material. The fact that DeliveryAx is a subsidiary makes all the difference. A subsidiary is

an entirely different entity, just as if another organization owned DeliveryAx. “A subsidiary is a

separate legal entity from the parent, although owned by the parent corporation.  Usually, the
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subsidiary is wholly-owned by the parent corporation.” (Majaski, 2020) Some may say that ASC

606 is applicable because of this statement:

606-10-25-18A An entity that promises a good to a customer also might perform

shipping and handling activities related to that good. If the shipping and handling

activities are performed before the customer obtains control of the good (see

paragraphs 606-10-25-23 through 25-30 for guidance on satisfying performance

obligations), then the shipping and handling activities are not a promised service

to the customer. Rather, shipping and handling are activities to fulfill the entity’s

promise to transfer the good.

Not applicable because it is a subsidiary.

ASC 606 Case Study. ASC 606, Revenue from Contracts with Customers, provides five

steps to recognizing revenue; step 5 requires an entity to “recognize revenue when (or as) the

entity satisfies a performance obligation.” Describe in general the key principles of this step (and

any applicable implementation guidance) that would be relevant to determining how to recognize

revenue for the transactions described in this case. The principle here is that if a contract is

fulfilled or at a preplanned stage of fulfillment then the revenue must be recognized. If there are

distinct areas within a contract that allow for it to be broken up into smaller parts, then at these

distinct areas revenue recognition is appropriate. (Financial Accounting Standards Board, 2016)

Conclusion. Revenue Recognition under the cognizance of IFRS 15 or ASC 606 has not

really changed. When I further look at revenue recognition the implementation has not really

changed either to me I read the same standard written in an expanded form. My understanding

of revenue recognition has always been one of offer, agreement, and consideration. The five-
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step model expands upon the basic business law and then further expands upon itself with

explaining the implementation of the five-step model.

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Reference

Financial Accounting Standards Board. (2016) Financial Accounting Series: Revenue from

Contracts with Customers (Topic 606). https://asc.fasb.org/imageRoot/32/79982032.pdf

International Financial Regulatory Standard. (2018) IFRS 15 Revenue from Contracts with

Customers. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-

contracts-with-customers/

Majaski, C. (2020, August 28). What's the Difference Between a Subsidiary and a Wholly

Owned Subsidiary? Retrieved November 11, 2020, from

https://www.investopedia.com/ask/answers/032615/what-difference-between-subsidiary-

and-wholly-owned-subsidiary.asp