The sale is earned when control passes
A customer wheels a refurbished e-bike out of Morrow Bikes with a one-year service plan attached, having paid $1,100 by card. The cash is in the bank tonight. The revenue is another matter, and it arrives in pieces.
Revenue is not the invoice total and not the cash received. It is what the business has earned by handing the customer what was promised. That makes this a Scorecard (income statement) question, and the reflex is the second of the five: which clock? The card payment landed on the cash clock. Revenue lands on the accrual clock, when the promise is kept.
Under US GAAP (ASC 606) and IFRS (IFRS 15) the rule has five steps: identify the contract, identify the distinct promises in it, set the transaction price, allocate that price across the promises, and recognize revenue when or as each promise is satisfied. Each distinct promise is a performance obligation. Revenue arrives when control transfers to the customer, and control can pass at a point in time, like handing over a bike, or over time, like a year of tune-ups. Paying early does not speed up the performance.
- 1Identify the contract
- 2Find the distinct promiseseach one is a performance obligation
- 3Set the transaction priceincluding estimated variable amounts
- 4Allocate the pricein proportion to standalone selling prices
- 5Recognize revenuewhen or as each promise is satisfied
Worked example: a bike and a year of tune-ups
Sold on their own, the bike lists at $1,000 and the plan at $200, so the bundle carries a $100 discount. Allocate the bundle price in proportion to standalone selling prices. The bike gets 1,100 × 1,000 ÷ 1,200 = $916.67. The plan gets 1,100 × 200 ÷ 1,200 = $183.33. The bike's share is revenue the day it leaves the shop. The plan's share is earned month by month, 183.33 ÷ 12 = $15.28 a month, as the tune-ups are provided.
The opposite mistake is splitting what belongs together. Not every promised activity is a distinct obligation. If Morrow fits a custom motor kit that only works once it is built into the customer's frame, the kit and the fitting may be one combined obligation, satisfied when the whole job is done. Read the arrangement before applying a memorized timing rule. Collectability, changes to the contract and uncertain prices each get their own treatment inside the same five steps.
On the day of the sale, which statement about the $1,100 is precise?