Usage-based service fees are evaluated under Topic 606 based on the enforceable rights and obligations in the contract. When the existing contract obligates the entity to provide services and the customer to pay as usage occurs, the resulting amount may represent variable consideration. When the customer controls whether to purchase additional distinct services, the usage may represent an optional purchase. An option becomes a performance obligation when it provides the customer with a material right.
Variable consideration is estimated and included in the transaction price only to the extent that a significant reversal of cumulative revenue is not probable. Variable consideration may be allocated entirely to a performance obligation or to a distinct service within a series when the allocation requirements are satisfied.
The right-to-invoice practical expedient may apply when the entity has a right to consideration in an amount that corresponds directly with the value to the customer of the entity's performance completed to date.
The sales-based or usage-based royalty exception applies to consideration promised in exchange for a license of intellectual property. Revenue is recognized at the later of the subsequent sale or usage and the satisfaction, or partial satisfaction, of the related performance obligation.
A receivable represents an unconditional right to consideration except for the passage of time. A contract asset remains conditional on something other than time. A contract liability arises when consideration is received or becomes due before the related goods or services are transferred.
All contract patterns, timing sequences, heatmaps, and revenue-state mosaics are City Shift Finance analytical illustrations. Actual accounting conclusions depend on the complete contract terms, enforceable rights, performance obligations, pricing provisions, measurement processes, and reporting circumstances.
Source: FASB Topic 606, FASB Revenue Recognition Transition Resource Group Memo 48, FASB Transition Resource Group guidance on measuring progress and the right-to-invoice practical expedient, and FASB guidance on sales-based and usage-based royalties for licenses of intellectual property.
