Summary Business Accounting

Question:

Richter Landscaping writes an agreement with a customer indicating that it will provide future

landscaping services at a date and price to be determined. Does this agreement meet the definition of a

contract? Briefly explain your answer.



Answer:



An agreement needs to have the following five characteristics to qualify as a contract for revenue

recognition purposes under the proposed ASU:

1. Commercial substance. The contract is expected to affect the seller’s future cash flows.

2. Approval. Each party to the contract has approved the contract and is committed to satisfying

their respective obligations.

3. Rights. Each party’s rights are specified with respect to the goods and services to be

transferred.

4. Payment terms. The terms and manner of payment are specified.

5. Performance. A contract does not exist if either party can terminate a wholly unperformed

contract without penalty.

The Richter agreement does not satisfy characteristic number 4, and may not satisfy characteristics 3 and

5 as well. Therefore, it does not qualify as a contract for purposes of recognizing revenue.