Question

Presto Hospitality—Revenue Recognition Assume Presto concludes that its concession agreement with Stadium Co. is not a lease. In that case, apply the five-step revenue process in ASC 606 to this arrangement. Assume you are evaluating appropriate revenue recognition for the contract and for individual transactions that will arise within the scope of the contract (for example, a sale of a hot dog to a customer in the stadium). Assume a hot dog retails for $6, of which Presto retains 50%.

Answer 1

Answer

In contracts with customers, an entity should recognize revenue in a way that depicts the amount and timing of consideration received for transferring goods or services. To achieve this, an entity should apply the five-step approach outlined in the new revenue standard:

• Step 1: Identify the contract with a customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Step 1: Identify the contract with a customer:

The new revenue guidance defines a contract as an agreement between two or more parties that creates enforceable rights and obligations. Standard setters identified the attributes below as essential parts of a contract:

All parties have approved the agreement.

All parties are committed to fulfilling their obligations.

Each party’s rights are identifiable.

Payment terms are identified.

The contract has commercial substance.

Collectibility is probable

Step 2: Identify the performance obligations in the contract:

A performance obligation is a promise to transfer goods or services to a customer. This step requires an entity to identify all distinct performance obligations in an arrangement. A good or service is distinct when (1) the customer can benefit from the good or service on its own or with resources the customer already has access to, and (2) the good or service can be transferred independent of other performance obligations in the contract (even if it is transferred with other goods or services). Goods or services that are not considered distinct should be combined with other goods or services until the bundle is distinct.

The standard directs entities to consider performance obligations that are explicitly outlined in the contract as well as any obligations the customer may expect because of established business history.

Step 3: Determine the transaction price:

The transaction price is the amount of consideration an entity expects to be entitled to for transferring promised goods or services. The consideration amount can be fixed, variable, or a combination of both. The transaction price is allocated to the identified performance obligations in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled.

ASC 606 allows two methods for estimating variable consideration i,e concessions: (1) expected value and (2) most likely amount. A company should choose the method that will provide the best estimate of the amount to which it will be entitled.

For Hot dogs transaction price is given in the agreement i.e Hot dog sold to cstmer at $6 from that Presto retain 50%. Presto recognized revenue from sale of Hot dogs at $6.

Step 4: Allocate the transaction price to the performance obligations in the contract:

When a contract includes more than one performance obligation, the seller should allocate the total consideration to each performance obligation based on its relative standalone selling price.

If there are multiple performance obligations in a contract, the seller must determine if there is any variable consideration or discounts. Variable consideration and discounts should only be allocated to the performance obligations they are related to.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation:

The final step in applying the new revenue recognition standard is to recognize revenue when or as the performance obligations in the contract are satisfied.

A performance obligation is satisfied when or as control of the good or service is transferred to the customer.

Revene recognised when hot dogs sold to cstomers.