Under Step 2 of the Revenue Recognition model, Accounting Standards Codification (ASC) 606 introduces the “series” provision, which intends to simplify accounting for contractual arrangements in which a series of distinct goods and services that are substantially the same are treated as a single performance obligation. Without this provision in the guidance, each good or service would be accounted for as its own performance obligation with a separately allocated transaction price.
The series provision falls under Step 2 of the Revenue model: identify the performance obligations in a contract. A performance obligation is a promise to provide either:
(a) a distinct good, service, or bundle of either; or
(b) a series of distinct goods or services that (1) are substantially the same and (2) are transferred with the same pattern to the customer
To qualify for series treatment, both requirements (1) and (2) must be met.
(1) Substantially the Same
A series of distinct goods or services that are substantially the same are those that are separately identifiable (i.e., distinct) within the context of an arrangement, such as one delivery out of a set of 10 monthly deliveries; or each identifiable increment in a long-term service contract. (For more information on distinct goods or services, see Distinct within the Context of the Contract).
The guidance does not provide a clear definition to use for determining whether goods or services are “substantially the same.” Instead, the guidance provides three illustrative examples (ASC 606-10-55-125 to 55-128, 55-157B to 55-157E, and 55-221 to 55-225). The first example presents a hypothetical cleaning services contract. Each increment in the service (i.e., a weekly cleaning) is distinct within the context of the contract, but the same service is being delivered in each increment. The second example describes a contract for asset management services that are provided on a daily, ongoing basis. Total services provided will be segregated into distinct services by the time period in which the services are rendered. The third example involves a hotel management company providing certain management service to a customer-owned property for a 20-year period. Although day-to-day activities may vary depending on property needs, all activities are considered management services. As such, each day is distinct and the same service is being delivered daily.
In all three cases the services are substantially the same, and would be treated as single performance. In each example, services are delivered consecutively. It is worth noting, however, the Codification does not state that consecutive delivery is necessary for distinct goods or services to be a series.
(2) The Same Pattern of Transfer
ASC 606-10-25-15 provides two criteria for determining whether a series has the same pattern of transfer:
- Each distinct good or service in the series would meets the criteria to be a performance obligation that is satisfied over time (ASC 606-10-25-27)
- The same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation to transfer each good or service in the series to the customer. (For more information on measuring progress of satisfying performance obligations, see RevenueHub article Input vs Output.)
The series provision is intended to simplify the application of the revenue model and promote consistency in identifying performance obligations when an entity provides essentially the same service over time.
On January 1, 20X1, Seasnack IT Company enters into a 3-year contract with Aluster Telecom to provide a monthly system service for $36,000. At the time of contract inception, Seasnack’s standalone selling price for a year of service is $12,000. The services provided are the same each month and the pattern of transfer to the customer is the passage of time (services provided per month).
As such, Seasnack determines that it is providing a series of distinct services (1) that are substantially the same and (2) have the same pattern of transfer. Therefore, the services will be treated as a single performance obligation satisfied over time.
Allocation of Variable Consideration and Changes in Transaction Price
In situations where an entity enters into a contract with the customer to provide non-distinct services, the services may be accounted for as a single performance obligation. If that arrangement contains variable consideration (such as a performance bonus or discount), the entire variable amount is allocated to that performance obligation.
However, in a transaction covered by the series guidance, variable consideration is allocated to the distinct good or service to which the consideration relates. For example, suppose that the contract between Aluster and Seasnack provides for an all-or-nothing 10 percent annual bonus ($1200) to Seasnack if the service is completed within the first two weeks of all twelve months in the year. In Year 1, Seasnack completes service within the first two weeks of every month. Seasnack would conclude that, because the bonus relates specifically to the efforts for distinct services performed through Year 1, the performance bonus is recognized at the end of Year 1.
Accounting for contract modifications depends on whether undelivered goods or services are distinct from those already transferred. If they are distinct, including circumstances when the remaining distinct goods or services are a part of a series, the contract modification is accounted for on a prospective basis. If they are not distinct, the contract modification is accounted for as a cumulative adjustment. (See Contract Modifications Part I, II, and III for more information on accounting for contract modifications.)
Part A. Refer back to the example about Seasnack’s contract with Aluster. Suppose that on December 31, 20X2, the two parties negotiate a price reduction so that the services for Year 3 will be priced at its present standalone selling price of $10,800 for the final year. Because the single services performance obligation is a series of distinct services in accordance with ASC 606-10-25-14(b), Seasnack will allocate the change in transaction price entirely to the distinct services subsequent to the modification (in other words, there will not be a cumulative adjustment to revenue for the prior years as a result of the price reduction).
Part B. Suppose the modification also extends the life of the contract for an additional three years (from January 1, 20X4 – December 31, 20X6) for an additional $28,800 ($9,600 per year). Seasnack will recognize the remaining amount on a straight-line basis, or $9,900 per year.
Consecutive distinct goods and services
Some stakeholders assumed that the distinct goods or services must be performed consecutively in order to be recognized as a series. Proponents of this view cited the following to support this position:
- BC 113 states that the Boards included the series guidance to promote a more constant approach to identify performance obligations in “circumstances in which the entity provides the same good or service consecutively over a period of time.”
- BC 116 states that ASC 606-10-25-14b applies to “goods or services that are delivered consecutively, rather than concurrently.”
Additionally, previous drafts of the standard contained the word “consecutively” when addressing accounting for series guidance. The word was also included in papers prepared by the Boards’ staff during the re-deliberations process for the 2011 Exposure Draft. Proponents assumed that the word’s inclusion in the previous draft underscores that the Boards’ thinking when drafting the guidance was for the series guidance to apply only to goods or services delivered consecutively.
However, the joint Transitional Resource Group (TRG) suggests otherwise. BC 113 does not explicitly exclude goods or services that are not delivered consecutively; rather it states that the intention is to promote a more constant approach in those circumstances when delivery is consecutive.
Furthermore, BC 116 is a response to comments on the 2011 Exposure Draft that questioned whether or not the proposed guidance at the time applied only to consecutively delivered goods or services. The Boards responded, stating that their intention was to address consecutively delivered goods or services rather than those goods or services concurrently delivered. The Boards indicated that they did not believe explicit guidance on accounting for concurrently delivered goods or services with the same pattern of transfer is necessary. However, the Boards have never stated that the guidance would not be applicable to those that are concurrently delivered. The Boards ultimately removed the word “consecutively” from the final draft and TRG members generally agreed that a series of distinct goods or services need not be consecutively transferred.
Finally, the only guidance on determining if concurrently delivered goods or services qualify as a series is the statement that the goods or services must be delivered using the “same pattern of transfer.” Concurrent transfers can certainly fit that description.
Revenue recognition as a single performance obligation
When accounting for a series as a single performance obligation, entities may find that the series results in a different pattern of revenue recognition than it would if each good or service were accounted for as a separate performance obligation. Some stakeholders suggested that such treatment is inappropriate. However, ASC 606-10-25-15 does not state that treating the goods or services as one performance obligation or multiple obligations must have the same effect. Furthermore, the TRG affirms that the accounting effect might be different when goods or services are treated as one performance obligation. BC 113 states that the overall intention of the series provision is to simplify accounting for transactions. Therefore, a stakeholder ultimately undermines the Boards’ objective when it undertakes otherwise unnecessary efforts to calculate the revenue recognition impacts of both recognizing as a series and not doing so.
The TRG used the following example to illustrate this issue.
An entity contracts with a customer to perform a manufacturing service that results in the production of 10 widgets. The manufacturing service will be performed over a 3-year period. The contract price is CU100 million and the standalone selling price for each widget is CU10 million.
Total expected costs are anticipated to be CU80 million. The service the entity will provide to the customer in producing each widget is substantially the same, but the design is new, so the entity expects a decline in production costs over time. Production of the first five units is expected to cost CU9 million/widget. The costs to produce the other five widgets are expected to be CU7 million/widget.
For the purposes of this example, assume the entity determines that each service the entity will provide in producing 1 of the 10 widgets is distinct, meets the criteria to be satisfied over time, and that the same cost-based measure of progress would be used for each service the entity provides to produce 1 unit (thus, both of the series provision criteria in paragraph 606-10-25-15  are met). The following demonstrates the difference in accounting that results from concluding the series provision applies rather than concluding that the contract is for 10 separate performance obligations.
Comparison to ASC 605
A contract that is considered a series of distinct goods or services under ASC 606 would be considered a multiple-element arrangement under ASC 605. Under ASC 605, an entity evaluates the contract and identifies separate units of accounting. This is similar to identifying performance obligations under ASC 606. Under ASC 606, once the separate units are identified, the consideration is allocated to each unit based on its relative selling price. There is no explicit provision under ASC 605 similar to the series provision defined in ASC 606, but in practice entities commonly do recognize revenue for service contracts and other series-type offerings in a similar manner. Therefore, under ASC 606, timing and amounts of recognized revenue will likely resemble proper accounting under ASC 606. But, ASC 606 is intended to simplify accounting for a contract that qualifies as a series of distinct goods or services.
A series of distinct goods or services is a contract containing multiple distinct goods or services that are substantially the same and have a similar pattern of transfer. An entity concludes that distinct goods or services have a similar pattern of transfer when each good or service meets the criteria to be a performance satisfied over time, and uses the same method to measure progress toward completion. If the distinct goods or services in a contract qualify as a series, all the goods or services in the contract are treated as a single performance obligation.
Accounting Standards Update (ASU) 2016-10, issued by the FASB in April 2016, addresses the subject of this article. ASU 2016-10 provides a new illustrative case for applying series guidance. The changes made to ASC 606 as a result of this update are reflected in the article above.
Jasper Martin contributed to this article.
- ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.”
- ASU 2014-09 “Revenue from Contracts with Customers. Basis for Conclusions 113 to 116.”
- ASC 606-10-25-10 to 13, Contract Modifications
- ASC 606-10-25-14 to 15, Identifying Performance Obligations
- ASC 606-10-25-24 to 25; 25-27 to 25-30, Revenue from Contracts with Customers-Performance Obligations Satisfied Over Time
- ASC 606-10-32-42 to 45, Changes in the Transaction Price
- ASC 606-10-32-39 to 41, Allocation of Variable Consideration
- TRG Memo No. 27, “Series of Distinct Goods or Services“
- KPMG, “Issues In-Depth: Revenues from Contracts with Customers,” May 2016. Section 5.2.3.
- EY, “Technical Line: A closer look at the new revenue recognition standard,” Section 4.1. 16 June 2014.
- PWC, “Revenue from contracts with customers” August 2016. Section 3.3.