How do you determine whether revenue is recognized over time or at a point in time?

Question

AcadiFi · Accepted Answer

This is the most judgment-intensive part of revenue recognition and a high-probability CFA Level II exam topic. The criteria are clearly defined in IFRS 15:

**Revenue is recognized OVER TIME if ANY of these three criteria are met:**

1. **Customer simultaneously receives and consumes benefits** — e.g., monthly cleaning services, SaaS subscriptions, consulting delivered weekly

2. **The entity's performance creates or enhances an asset the customer controls** — e.g., building a custom facility on the customer's land

3. **The asset has no alternative use to the entity AND the entity has an enforceable right to payment for performance to date** — e.g., custom manufacturing where the item can't be sold to anyone else and the contract guarantees payment for work done

**If NONE of these criteria are met → recognize at a point in time.**

**Example — Over Time:** Steelwright Engineering builds a custom manufacturing plant for Pacifica Motors on Pacifica's property. Pacifica controls the asset as it's being built (criterion 2). Revenue is recognized using a progress measure.

**Input method:** % complete = Costs incurred to date / Total estimated costs
- Costs to date: $18M, Total estimated: $60M → 30% complete
- Contract price: $80M → Revenue = $80M x 30% = **$24M**

**Output method:** Based on milestones, units delivered, or surveys of work performed

**Example — Point in Time:** Drexel Optics manufactures standard telescopes and ships them to Overland Distributors. The telescopes are standard products (alternative use exists), and title transfers at delivery. Revenue recognized when the customer obtains control — typically at delivery.

**Transfer of control indicators (point in time):**
- Entity has a right to payment
- Customer has legal title
- Physical possession transferred
- Customer has risks and rewards of ownership
- Customer has accepted the asset

**Financial Statement Impact:**

| Method | Balance Sheet | Income Statement |
|---|---|---|
| Over time | Contract asset (costs + profit > billings) or contract liability (billings > costs + profit) | Revenue recognized progressively |
| Point in time | Inventory until delivery | Revenue lumpy — all at once |

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How do you determine whether revenue is recognized over time or at a point in time?

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