 Hello and welcome to the session in which you would look at step five of five for the revenue recognition process in the prior recordings. We looked at identifying the contract. We looked at identifying the separate performance obligation or obligations in the contract. We looked at how we determine the transaction price. Then we allocated the transaction price to the separate performance obligation and in step five who are ready to recognize revenue. And when do we recognize revenue when the performance obligation or obligations is or are satisfied. In other words, when we do the work. So this is the last step. So those are the five step process and the contract. If you're not familiar with them, go back and look from step one through step five, look at the recording to see the big picture. Now, learn each one separately because you could be asked about one specific step, but also you want to know the big picture. And this is basically the big picture. So when do we recognize revenue? Simply put, as we satisfy our performance obligation or obligations, we could have more than one by transferring the goods and service. So it's all about the transfer of control. What do we mean by the transfer of control? It means when who control the risk and reward. If I control the risk, if I have the risk, not control the risk. If I have the risk of the item of the product and I also have the reward, then I have control. Think about it. If I have inventory in my warehouse or any type of asset that was delivered to me, now I bear the risk. If anything happened to that asset, it's my responsibility. At the same time, if I sell this asset and make a large profit, I can get the reward. If I have the risk and the reward, it's my product. I purchased it. So the other party made a sale. So the question is, when did the transfer of control took place? And when that happens, then guess what? For the person that provided the service, they have a revenue. And we can recognize revenue either over time. It means over a period of time or a point in time, one point in time. So it's very important to understand the differences between those two, over time or point in time. We're going to start by point in time because point in time is pretty straightforward in a sense that what does that mean point in time? It means something happened at this particular period, at this particular point in time, not period, at this particular date. And as a result, there was a transfer of goods and services. There was transfer of control. So we need to take a look at what indicators, what indicators tells us that the control has been transferred. And we're looking from a customer's perspective. Well, let's look at some indicators. Well, the company has a right to payment for the asset. When do you have the right to payment of the asset? Well, would you build a customer if you did not deliver the goods and the services? You can, but they will ignore it. They could be upset. They could call you. Why are you billing me if you did not do the work yet, right? So if you have the right to build a customer and the customer is okay with it, then you change control. There was a change of control. The company has transferred legal title to the asset. Well, the company transferred the legal title. Simply put, if you walk into a store and you purchase something and they gave you a receipt, you paid them the money, you gave you a receipt. That receipt is basically a legal title. Now in the real world, the legal title could be actually a legal document. Like if when you buy a house, when you buy a car, there's a legal title to the asset. But the point is, if the legal title has been transferred, that's it. The sale took place. And that's a point in time. This is when the sale took place. Three, the company transferred the goods, physical goods. Now we're talking about physical goods or perform the service. So there is a control de facto. In other words, I gave you the asset. You can do whatever you want with this asset. Well, we have a sale, whether I transferred the legal title or not. If you have the asset and you can do anything with it, that's basically a de facto control. The customer has significant risk and reward of the ownership. Whatever you have, whatever you are enjoying, you have the risk for it as well as a reward. As I explained earlier, you can sell it or if in case the warehouse goes on fire and you lose it, you bear the risk in case you sell it for 20 times the purchase price, you have the reward. Then guess what? A sale took place and that's an indication that the sale took place. Or the customer accepted the asset. If you accepted the asset and it's your asset, by accepting the asset, we have a sale. So think of it when, again, you walk, keeping it simple for point and sale because point and sale is pretty straightforward. A point in time, not point and sale. A point in time means the transfer took place at this moment and you can recognize the revenue. Think of all of us today. Most likely you made a purchase and there was a transfer of title and a point of time today. Let's assume you walk into a store and not even talk into anyone. There is a vending machine. When you put your money into that vending machine and you take the asset, and they don't give you a receipt, by taking the asset, you accepted the asset. Guess what? That's a sale. The company for that vending machine can record the sale because you accepted the asset. So there was no legal title transfer. Just you bought a chocolate bar. That's it. You accepted the chocolate bar. It's a sale. Now the next thing we're going to look at is when the sale occurred, when you record the revenue over a period of time. Before we proceed and explain period of time recognition, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. My motto is helping CPA candidate and accounting student one at a time by providing you resources. I don't replace your CPA review course. I provide you lectures, multiple choice, through false exercises. This is a partial list of my accounting courses that's going to help you. That's going to enhance your accounting knowledge. That's going to help you in your courses and your CPA, CMA preparation. My CPA material is aligned with your Becker, Roger, Gleam or Wiley or Miles for that matter. So it's easy to follow. I also give you access to 1500 previously released AI CPA questions in their original format, including detailed solutions. So if you are studying for the CPA exam, you really don't want to miss those questions. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording. It helps me tremendously. Share it with other. Connect with me on Instagram. I'm trying to grow my Instagram following Facebook, Twitter and Reddit. So when do we meet the criteria to recognize revenue over a period of time? Well, if we meet one of the following three criteria, let's explain them. One, the customer receives and consume the benefit as the seller performs. What does that mean? Let's assume you purchased 50 tons of wheat. That's the contract. And I already delivered 10 tons of that wheat. Well, if I deliver 10 tons of that wheat, well, 10 divided by 50, I can recognize one-fifth of the contract. I did not deliver the whole thing. I'm recognizing revenue over time as I deliver and you are enjoying the wheat. You are using the wheat for whatever purpose. Same concept apply for a subscription-based services. If you subscribe to a newspaper, to a magazine, they deliver those over a period of time. So as they deliver them, they can recognize the revenue partially for that delivery. So if you deliver four, let's assume Time Magazine for the whole year. So every time they deliver one month, they can recognize one-twelve of the revenue. Also, or you need to meet one, not all three, one of the three criteria. This one is done. Two, the customer controls the assets as it's created or enhanced. So let's assume you contracted with a software company to enhance your software, to update your software features for your business. Guess what? As they are updating the software, as they are updating one feature, now, for example, you could communicate with your supplier electronically, or you could communicate with your customer through a messenger. Guess what? They are enhancing your software. As they are enhancing your software and you are enjoying the software, you are using it, then they can recognize the revenue over a period of time. Also, if they are building something for you and that's something that asset has no alternative use. Think about a cruise ship. A cruise ship, when a company contracts you to build a cruise ship, it's going to be very specific to that company, like the Norwegian airline. If they want to build a cruise ship, it's very specific asset. Well, if that's the case, then there's no alternative use. It means as you are building this cruise ship, then as you are building it, you can recognize the revenue. Now, how would you recognize the revenue? We'll talk about this. This becomes a long-term construction project, which we'll talk about later. So the customer receives the benefit as the company performs, or either they receive the benefit, or the company has the right to the payment. It doesn't have to be both. As it's being built, you don't receive the benefit really because you're waiting until it's done. But the company has the right of payment and this right is enforceable. In other words, if they change their mind, you're 20% or 30% way into building this cruise ship. And Norwegian Airlines said, you know what? I'm no longer interested in this project. That's fine. You got to give me the money because we have an enforceable project. We have an enforceable conditions. There's a penalty involved. Therefore, if that's the case, you can recognize revenue over a period of time. Now, bear in mind, if you are building regular inventory, you cannot use this recognizing period over time. Think about it. It means every time you manufacture the inventory, you would recognize the revenue. No, inventory is you are building the inventory, but you don't know who you're going to sell it to. You have no right of payments. For one thing, you have no rights of payments. If you're building inventory, how would you know you're going to sell it? If you can't sell it, then you have no rights of payments. But here, you are building an asset that's specific to a customer. Then you have to write the payments because you're going to spell this in the contract before you start building a cruise ship. That's a multi-million dollar project. Who knows how expensive it is? This is what we are discussing here. Also, you could recognize revenue in two ways when it's over a period of time. Most of the time, if the work is service in nature, in other words, you're not delivering a physical good, then you would use the straight-line method. Simply put, if the contract is for three years and the contract is for 30,000, you divide it by three and you would recognize $10,000 every year from this project. Or you can use what's called input-output measure, input-output measure. And basically, the most popular input-output measure is looking at how much cost you incurred in this project, dividing it by total cost up to date. And that's the most popular method in recognizing revenue over a period of time. That's not the only method. You can use, for example, if you are building a highway. Let's assume you are building 100-mile highway. Let's assume you completed 20 miles of this. Well, if you completed 20 miles, 20 miles is 20% of the project. You can recognize 20% of the revenue. Or if you are building a building, you can use square footage. How much of the square footage you have completed so far, and you can recognize revenue based on that. But for accounting purposes, we're going to be using the cost to total cost method. And don't worry, we're going to work an example with long-term construction project. You need to be familiar with this. What should you do now? Well, go to farhatlectures.com and work MCQs, multiple choice questions, to reinforce the concept. Because you really want to learn this. How would you learn this? Well, listening to me is good. That's going to give you an idea, but you want to test your knowledge. You want to work exercises. And this is what you do at farhatlectures.com. Also, what I'm going to do, I'm going to be working additional practice exercises to illustrate those concept of revenue recognition. Invest in yourself. Don't shortchange yourself. Accounting is important. Good luck. Study hard. And of course, stay safe.