A contractor builds a custom facility on the customer's land under a contract that gives the contractor an enforceable right to payment for work performed to date if the customer cancels for reasons other than the contractor's non-performance. The facility has no alternative use to the contractor once construction begins. Under ASC 606-10-25-27, which criterion is satisfied that would support recognizing revenue over time rather than at a point in time?
- The entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date
- The customer simultaneously receives and consumes all of the benefit of the entity's performance as the entity performs, which is the only criterion the standard allows
- The entity retains legal title to the facility indefinitely, which is the sole determinant of over-time recognition
- The contract price is fixed rather than variable, which automatically qualifies it for over-time recognition
Correct answer: A. The entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date
ASC 606-10-25-27 sets out three independent criteria, any one of which is sufficient for over-time recognition, and the facts given — no alternative use plus an enforceable right to payment for work performed to date — map directly onto the third criterion in the standard. The simultaneous-receipt-and-consumption criterion is a real alternative path under the same paragraph, but describing it as the only criterion the standard allows is wrong because the standard explicitly lists three separate, independently sufficient criteria, and the facts here actually illustrate the alternative-use-and-payment criterion instead. Legal title is expressly identified elsewhere in ASC 606 (606-10-25-30) as merely one indicator among several used to assess point-in-time transfer of control, not a standalone determinant of over-time recognition, so treating retained title as decisive misapplies the standard's structure. Whether a price is fixed or variable relates to determining the transaction price in step three of the model and has no bearing on which of the three over-time criteria in step five is met.
Source: FASB Accounting Standards Codification: ASC 606-10-25-27, Revenue from Contracts with Customers — Performance Obligations Satisfied Over Time