Question

• The revised revenue recognition accounting standard employs a five-step process to achieve the core principle to recognize income upon the transfer of promised goods or services. Use the Internet or Strayer Library to research a company that bundles a product and a service. Examine income recognition of the bundled product and service for the company by addressing each step in the five-step process for revenue recognition. Give your opinion on the most critical step for accurately reporting revenue in the five-step process. Provide support for your response.

Answer 1

Solution part A

five-step process of income recognition for bundled goods & services for a company  that bundles a product and a services is:

Step 1: Identify the contract with the customer.

Step 2: Identify The Performance Obligations In The Contract separately.

Step 3: Determining the transaction price.

Step 4: Allocate the transaction price to each separate performance obligation in the contract.

Step 5: Recognize revenue immediately after performance of each obligation is Satisfied.

Solution part B

a) The entity can adopt two methods for transition i.e. retrospective method or modified retrospective method.

b) In the retrospective approach, it will require to apply the new guidance to each of the prior reporting period.

c) Whereas in the modified retrospective approach, it wont be requiring such changes to prior reporting period. The guidance will apply only to contracts with remaining obligation as on the effective date and to those contracts initiated after the effective date. This method hence makes the adoption easier but leads to higher risk in the year of adoption.

On the basis of above, the most critical step for accurately reporting revenue  in the five-step process is "Adoption of transition method".