Step 5: over time or point in time, and measuring progress

• Apply the three criteria in 606-10-25-27 to decide whether an obligation is satisfied over time
• Use the control indicators to find the point in time for other obligations
• Select an output or input method and exclude costs that do not depict transfer
• Apply the right-to-invoice practical expedient

Control is the test

Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring control of a good or service (606-10-25-23). Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. For each obligation, the entity decides at contract inception whether it is satisfied over time; if not, it is satisfied at a point in time (606-10-25-24).

The three over-time criteria

Under 606-10-25-27, an obligation is satisfied over time if any one of these is met:

1. The customer simultaneously receives and consumes the benefits as the entity performs. Routine recurring services such as cleaning or payroll processing.
2. The entity's performance creates or enhances an asset the customer controls as it is created. Construction on the customer's land is the common example.
3. The performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

Criterion 3 has two parts. Alternative use is assessed at inception and considers contractual restrictions and practical limitations (606-10-25-28), such as significant rework cost to redirect a custom item. The right to payment must be an amount that approximates the selling price of the work completed to date (for example, costs incurred plus a reasonable margin), not just compensation for lost profit, if the customer terminates for reasons other than the entity's failure to perform. It must also be enforceable under the contract and the law of the jurisdiction. Read the termination clause and, if needed, get legal input.

Point-in-time indicators

If no criterion is met, the entity determines the point at which control transfers. 606-10-25-30 lists indicators:

• the entity has a present right to payment;
• the customer has legal title;
• the entity has transferred physical possession;
• the customer has the significant risks and rewards of ownership; and
• the customer has accepted the asset.

No single indicator decides the answer. Shipping terms matter: under shipping-point terms, control often transfers at shipment; under destination terms, at delivery. Bill-and-hold, consignment and repurchase arrangements have their own guidance, covered in lesson 13.

Measuring progress

For each over-time obligation, the entity uses a single method of measuring progress and applies it consistently to similar obligations, remeasuring at each reporting date (606-10-25-31 and 25-32). Changes in the measure are changes in accounting estimate (606-10-25-35).

• Output methods measure value transferred: surveys of performance, milestones reached, units delivered, time elapsed. They are direct, but units-delivered can misstate progress when work in process the customer controls is material.
• Input methods measure effort: costs incurred, labor hours, machine hours, resources consumed. Cost-to-cost is common in construction.

Under 606-10-25-34, exclude from the measure goods or services that do not transfer control, and include those that do. Two adjustments matter for input methods:

• Costs that do not reflect performance, such as wasted materials or rework from inefficiency not priced into the contract, are excluded from cost incurred.
• Uninstalled materials that are not distinct, transfer to the customer before installation, are significant relative to total costs and are procured from a third party without significant design involvement are recognized at cost (zero margin) rather than included in progress.

If the entity cannot reasonably measure the outcome but expects to recover its costs, it recognizes revenue to the extent of costs incurred until it can.

Right-to-invoice practical expedient

Under 606-10-55-18, if the entity's right to consideration corresponds directly with the value to the customer of performance completed to date, such as a fixed hourly rate, it may recognize revenue in the amount it has a right to invoice. A large upfront or back-end payment that does not track value disqualifies it.

See the percentage of completion calculator and the uninstalled materials calculator.

Cost-to-cost with uninstalled elevators