How do I decide whether revenue is recognized over time or at a point in time?

Question

AcadiFi · Accepted Answer

Start with the over-time tests. Revenue is recognized over time if the customer simultaneously receives and consumes benefits, if the entity creates or enhances an asset the customer controls as it is created, or if the asset has no alternative use and the entity has an enforceable right to payment for work completed. If none of those apply, recognize revenue when control transfers at a point in time.

Example: Summit BuildCo signs a $5,000,000 warehouse contract. By year-end it has incurred $1,800,000 of expected total costs of $4,500,000, and the land and work-in-process are controlled by the customer as construction occurs. Because the customer controls the asset as it is built, Summit recognizes revenue over time. Using cost-to-cost, progress is 40 percent, so revenue is $2,000,000 and gross profit is $200,000. If instead Summit were building a standard generator for inventory with no customer control and no enforceable right to payment, revenue would wait until delivery.

```mermaid
flowchart TD
  A[Contract] --> B[Over-time test?]
  B -->|Yes| C[Measure progress]
  B -->|No| D[Point in time]
  C --> E[Recognize revenue]
  D --> E
```

The exam trick is to focus on control, not billing. A company can invoice monthly and still recognize revenue at a point in time if control has not passed. Likewise, cash collection does not control timing under ASC 606. Practice more in our CPA FAR question bank.

How do I decide whether revenue is recognized over time or at a point in time?

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