Question:
Assume Estate Construction is constructing a building for CyberB, an online retailing company. Under
the construction agreement, if for some reason Estate could not complete construction, CyberB would
own the partially completed building and could retain another construction company to complete the job.
When should Estate recognize revenue, as the building is constructed or after construction is completed?
Explain your answer.
Answer:
A performance obligation is satisfied over time if at least one of two criteria is met:
1. The seller is creating or enhancing an asset that the buyer controls as the service is performed.
2. The seller is not creating an asset that the buyer controls or that has alternative use to the seller,
and at least one of the following conditions hold:
a. The customer receives and consumes a benefit as the seller performs the service.
b. Another seller would not need to reperform the tasks performed to date if that other seller
were to fulfill the remaining obligation.
c. The seller has the right to payment for performance even if the customer could cancel the
contract at the customer’s discretion.
Under Estate’s construction agreement with CyberB, if for some reason Estate could not complete
construction, CyberB would own the partially completed building and could retain another construction
company to complete the job. A new construction contractor would not need to reperform Estate’s work if
the new contractor completed the job. Therefore, criterion 2b is satisfied.
Assume Estate Construction is constructing a building for CyberB, an online retailing company. Under
the construction agreement, if for some reason Estate could not complete construction, CyberB would
own the partially completed building and could retain another construction company to complete the job.
When should Estate recognize revenue, as the building is constructed or after construction is completed?
Explain your answer.
Answer:
A performance obligation is satisfied over time if at least one of two criteria is met:
1. The seller is creating or enhancing an asset that the buyer controls as the service is performed.
2. The seller is not creating an asset that the buyer controls or that has alternative use to the seller,
and at least one of the following conditions hold:
a. The customer receives and consumes a benefit as the seller performs the service.
b. Another seller would not need to reperform the tasks performed to date if that other seller
were to fulfill the remaining obligation.
c. The seller has the right to payment for performance even if the customer could cancel the
contract at the customer’s discretion.
Under Estate’s construction agreement with CyberB, if for some reason Estate could not complete
construction, CyberB would own the partially completed building and could retain another construction
company to complete the job. A new construction contractor would not need to reperform Estate’s work if
the new contractor completed the job. Therefore, criterion 2b is satisfied.
