By: Art Winstead
Blog Series: Revenue from Contracts with Customers
Post 2 of 6
Step 1—Identifying Contracts With Customer for ASU 2014 – 09
For what it’s worth, despite the 700 plus pages, three volumes, two sections, and five steps of content in ASU 2014 – 09 “Revenue from Contracts with Customers” (Topic 606), there is no question in my mind, the application required for step one is by far the easiest to apply. That is not to say the other sections, parts, and steps are difficult. I do believe the requirements of Step 1 can be applied without too much worry, anxiety, and complication.
With all of that said, what is Step 1 of ASU 2014 – 09? It is to “identify the contract(s) with customers.” ASU 2014 – 09 offers a simple definition of a contract—agreement between two or more parties that creates enforceable rights and obligations. ASU 2014 – 09 continues with the following criteria an entity should apply in order to comply with the requirements of ASU 2014 – 09:
- Approval and commitment of the parties
- Identification of the rights of the parties
- Identification of the payment terms
- The contract has commercial substance
- It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods and services that will be transferred to the customer
Contracts can be written, verbal and even implied based on the entity’s customary business practice. Regardless, it must be enforceable.
ASU 2014 – 09 provides guidance for when an entity should combine contracts and account for them as one contract. Criteria for the combination of contracts could include contracts which were negotiated as a package or have consideration that is linked. In addition, consideration has to be given to contract modifications. It is easy to see a modification could be a separate contract or part of the same contract, i.e., the contract being modified.
For the most part, I would not anticipate the need for ongoing consultation with legal counsel as to the identification of a contract(s)—not to say that the identification of a contract won’t indeed require legal counsel from time to time. For the most part though, contracts within this topic should be obvious, in writing, understandable, and enforceable. On to Step 2 of the 5 Steps in 2014 – 09.
Art Winstead is a native of Greensboro, NC—he graduated from Grimsley Senior High School, and attended the University of South Carolina, earning his B.S. in Business (with a concentration in Accounting and a minor in Political Science) at the University of North Carolina—Greensboro. Art is also a Certified Fraud Examiner (CFE), Certified Financial Forensic (CFF), and holds the designation of Chartered Global Management Accountant (CGMA). He is a member of AICPA and is a member of NCACPA’s Board of Directors. Art has served on the State Mobility and Regulatory Response Committees of the National Association of State Boards of Accountancy (NASBA) and currently serves on the Global Standards Committee.