Question

Under what conditions does a company recognize revenue over a period of time?

Short answer

Revenue is recognized when the company transfers the asset and receives a considerable amount in return, and the asset will provide some benefit to the customer.

Step-by-step solution

Meaning of Revenue Recognition  

Revenue recognition is a widely accepted standard of GAAP that helps to define and record the transactions under which revenue is recognized. When a significant event occurs, revenue is often recorded, and the monetary amount is immediately measurable to the organization.

Conditions for recognizing revenue over some time

Companies can meet their performance requirements in a single instance or over some time. If one of the following three requirements is satisfied, revenue is recognized over some time:

1. As the vendor performs, the client obtains and consumes the advantages.

2. The asset is developed or upgraded under the ownership of the client (for example, a builder creates a building on a customer's property).

3. The company has no other use for the asset created or enhanced (for example, an aircraft manufacturer builds speciality jets to a customer's specifications). Either (a) the customer receives benefits as the company performs, and thus the task does not need to be re-performed, or (b) the company has a right to payment, and this task does not need to be re-performed.