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Services Revenue Recognition
For services revenue recognition, use one of the following four methods to recognize revenue. The method chosen is to be based on the nature and extent of the service(s) to be performed.
- Specific performance method. The specific performance method is used when performance consists of the execution of a single act. Revenue is recognized at the time the act takes place. For example, a stockbroker records sales commissions as revenue upon the sale of a client’s investment.
- Completed performance method. The completed performance method is used when more than one act must be performed and when the final act is so significant to the entire transaction taken as a whole that performance cannot be considered to have taken place until the performance of that final act occurs. For example, a moving company packs, loads, and transports merchandise; however, the final act of delivering the merchandise is so significant that revenue is not recognized until the goods reach their intended destination. If the services are to be performed in an indeterminable number of acts over an indeterminable period of time and if an objective measure for estimating the degree to which performance has taken place cannot be found, revenue is recognized under the completed performance method.
- Collection method. The collection method is used in circumstances when there is a significant degree of uncertainty surrounding the collection of service revenue. Under this method, revenue is not recognized until the cash is collected. For example, personal services may be provided to a customer whose ability to pay is uncertain.
- Proportional performance method. The proportional performance method is used when performance consists of a number of identical or similar acts. If the service transaction involves a specified number of identical or similar acts, then recognize an equal amount of revenue for each act performed. If the service transaction involves a specified number of defined but not identical or similar acts, then recognize the revenue for each act based on the following formula:
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Direct cost of individual act
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×
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Total revenues from
complete transaction |
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Total estimated direct costs of the transaction |
Related Topics
Revenue recognition criteria
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