1. Economic benefits related to income are likely to flow into the enterprise.
2. As economic benefits flow into the enterprise, the assets of the enterprise will increase or the liabilities will decrease.
3. The inflow of economic benefits can be reliably measured.
The recognition of income should meet four basic prerequisites: certainty, measurability, relevance and reliability. On the other hand, in many countries, the amount of income is usually determined by the fair value of receivables received or generated in transactions, that is, according to the total income after deducting cash discounts, sales discounts and sales.
Method of recognizing income
1. Determine the contract with the customer.
When determining the existence of a contract with a customer, the new standard (ASC 606) emphasizes the existence of enforceable rights and obligations in the legal sense, rather than the manifestation of the contract. A legally binding contract can be concluded in written form, oral form and commercial practice, and the form of the contract itself does not affect the legal effect of the contract.
2. Make clear the performance responsibilities agreed in the contract.
Under the requirements of ASC 606, enterprises now need to determine the performance responsibilities agreed in the contract. For enterprises, the common performance responsibility is to provide goods or services to customers. In this step, the enterprise needs to judge whether the goods or services provided in the contract can be clearly distinguished, and only the goods and services that can be clearly distinguished can be regarded as a performance responsibility, and then allocate the transaction consideration in the next step.
3. Determine the transaction consideration
It is clearly pointed out in the new standard that the transaction consideration refers to the consideration expected to be received for providing goods or services to customers, but the part collected for third parties needs to be excluded. This will have a great impact on the income of enterprises engaged in intermediary or consignment business, and the amount of consignment or collection can no longer be fully included in the income. In the future, the revenue recognition of this kind of business will only include the handling fee.