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Intermediate Accounting (Kieso)
Found in: Page 1031

Short Answer

How do companies recognize revenue from a performance obligation over time?

As they progress toward fulfillment is measured, revenue from a performance obligation is realized over time.

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Step by Step Solution

Meaning of Revenue Recognition

Revenue recognition is a concept in accounting. According to the revenue recognition principle, revenue is recognized when things are exchanged for a monetary value (amount) or when services are rendered, and a monetary value (cash) is received in return.

Companies recognize revenue from a performance obligation

Revenue from a performance obligation is recognized over time as the progress toward fulfillment is measured. The technique of progress measurement used should reflect the handover of control from the corporation to the customer. The cost-to-cost and units-of-delivery techniques are the most frequent. These approaches determine the amount of progress made in terms of costs, units, or value-added. Companies categorize many measurements as input or output measures, such as expenditures incurred, labor hours worked, tonnage produced, floors built, and so on. Input metrics (costs incurred, labor hours done) represent the time and effort put into a contract. Results are tracked using output measurements (tone’s produced, floors of a building built, miles of roadway completed, etc.). Neither can be applied generally to all long-term enterprises. Their application necessitates the application of judgment and careful adaptation to the situation. The cost-to-cost basis is the most common input metric used to gauge progress toward completion. A corporation calculates the percentage of completion using this method by comparing current expenses to the most recent estimate of total costs to execute the contract.

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