Chapter 8, Problem 1BCC

Basis for Conclusions Case 1: Control

According to ASC 606, an entity should recognize revenue when goods or services are transferred to a customer. Goods and services are transferred to a customer when the customer obtains control. Refer to the Basis for Conclusions section of ASU 2014-09 to answer the following questions.

1. 1. In considering a control-based model for revenue recognition, FASB could have specified that goods and services are considered to be transferred when the seller gives up control as opposed to when the customer receives control. Are these two concepts always the same? If not, why did FASB choose to specify that the transfer occurs when the customer obtains control?
2. 2. Is the control-based approach to revenue recognition new to ASU 2014-09, or has revenue always been recognized when control is transferred? What other approach(s) did FASB consider, and why did it choose the control model?
3. 3. Control is defined by FASB as the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Briefly, and in your own words, describe and explain each component of this definition.
4. 4. There was some disagreement by respondents to the Exposure Draft of ASU 2014-09 about using the notion of transfer of control to determine when revenue should be recognized. The respondents generally fen that the control model would work well for the sale of goods. However, some respondents felt that this model might not work as well for other types of transactions. What type of transactions were the respondents worried about? Why did they think the control model would not work as well for these transactions? How did these respondents think FASB should address this concern? What did FASB choose to do and why?