Steps Of Revenue Recognition
In any type of revenue transaction following steps has to be taken, the following steps have to be taken:
The first step is to identify the contract the company entered into with the customer. Every needed contract modification is considered during this identification, and the agreement is finalized.
The next step will be to identify the operational obligation of the business.
Then the price of the product must be eliminated. The transaction price is determined based on the amount acquired in exchange for any goods or services. While calculating transaction price, many things need to be kept in mind: if there is any financing component in the contract, if any amount of consideration has to be paid in the future to the customer, etc.
The price of the transaction will then be allocated to all equity obligations.
After the performance obligation is completely satisfied, revenue will be recognized in the entity’s books.
Measurement Of Non-Cash Consideration
Non-cash consideration has to be calculated at fair value. This proper value measurement has to be done on the transaction date. A date to receive consideration is not essential for this. If it is not possible to quantify the fair value of a non-monetary consideration, then the selling price of the goods and services at a fixed price is promised to the customer. This sale price is determined by exchange consideration. Fair value is the price of the exit. It is not a business-specific price. The value of an item that can be sold on the market.The entity’s intention regarding non-cash consideration is not relevant for the calculation of fair value. Sometimes, there could be a contract where goods are contributed to help complete the contract. It has to determine if the entity retains control of the goods even after completing the contract. If the power remains with the entity, those goods or services must be considered non-cash considerations. For example, Customer A has supplied specific goods to Manufacturer B to complete a contract. If those goods are used by B to complete the order of Customer A, and no extra benefit is received, then these goods will not amount to non-cash consideration. But if some of these goods are still unutilized and used by B to fulfill some other contract, then unutilized or leftover goods will be considered non-cash considerations.
Steps Involved In The Measurement Of Non-Cash Consideration are as follows:
Step 1: Identification of contracts with the customers.
Step 2: Identification of contractual obligations.
Step 3: Determine the price of the transaction.
Step 4: Allocation of work value in an obligation.
Step 5: Recognition of income when the operating obligation is satisfied.
Accounting Of Non-Cash Consideration
Company X enters into a contract to provide marketing services to Company Y for four weeks. The agreement was signed on 1st January 2019. The same work is performed for each week. For the service provided by Company X, the customer will provide 50 shares per week. It is decided in the contract that the customer will pay the shares on successful completion of work per week. It is assumed that the share price at the end of each week is as given below:
Week 1: $10 Week 2: $12 Week 3: $ 15 Week 4: $18 Journal entries to record the above transactions will be as follows:
The X company provides services in exchange for shares in the Y company. So the claims in company Y are considered an asset for company X, and they need to debit the shares in Y Ltd and recognize revenue. The normal balance of revenue account is credit and therefore, marketing revenue account is credited to show the increase in revenues.
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