This is one of the most commonly asked questions of all time, and irrespective of domain. It is as important as the “Tell me something about yourself question”. You must use all technical terms prescribed here and answer in the correct order
1. Identify the contract with the customer- • A contract is an agreement between two or more parties that creates enforceable rights and obligations. A contract can be written, oral, or implied by an entity’s customary business practices. • For a contract to exist the following five criteria must be met: The parties to the contract have approved the contract The entity can identify each party’s rights The entity can identify the payment terms The contract has commercial substance It is probable the entity will collect the amount to which it expects to be entitled.
2. Identify the performance obligations- • A performance obligation is the promise to transfer to the customer a good or service (or bundle of goods or services) that is distinct. • Distinct goods and services should be accounted for as separate units of account. • Entities need to determine if a good or service (or bundle of goods or services) is “capable of being distinct” and “distinct in the context of the contract.” • A series of substantially the same goods or services for which control transfers over time and that have the same pattern of transfer is accounted for as a single performance obligation.
3. Determine the transaction price- • Transaction price is the amount the entity expects to be entitled to in exchange for
transferring promised goods or services to the customer. • The transaction price may
include fixed amounts, variable amounts, or both. • To determine the transaction price, entities shall consider the effects of the following: Variable consideration The constraint on estimates of variable consideration Significant financing components Noncash consideration payable to the customer.
4. Allocate the transaction price- • The transaction price (from step 3) is allocated to each performance obligation
identified (from step 2). • Depending on the specific circumstances, one of the following approaches would be used to allocate the transaction price to the performance obligations: On the basis of each performance obligation’s stand-alone selling price Allocation of a discount or variability to a specific performance obligation (or a bundle of specific performance obligations) if certain criteria are met.
5. Recognize revenue when (or as) performance obligations are satisfied- • Requires consideration of the following: Recognition of revenue when (or as) control of the good or service is passed to the customer (at a point in time or over time) Overtime: Specific criteria needed to be met for satisfying performance obligations and recognizing revenue over time o If recognizing revenue over time, a measure of progress should be used to determine the pattern of when to recognize revenue Point in time: If revenue is not recognized over time, it is recognized at a point in time. There are indicators of when performance obligations are satisfied and revenue recognized for performance obligations satisfied at a point in time.
