A cleaning company contracts to provide daily office cleaning services five days a week for two years. Each day's cleaning is a distinct service, and every day's service is substantially the same and is transferred to the customer using the same measure of progress (time elapsed). Under ASC 606-10-25-14 and 25-15, how should the company account for this contract?
- As a separate performance obligation for each individual day of cleaning, each recognized only when that specific day's service is complete
- As a single performance obligation only if the customer pays a single lump sum in advance for the full two years
- As a single performance obligation consisting of the series of distinct daily services, applying one method of measuring progress to the whole series
- The contract cannot contain a single performance obligation because it spans a two-year period longer than one year
Why C? And why not the others?
Correct answer: C. As a single performance obligation consisting of the series of distinct daily services, applying one method of measuring progress to the whole series
ASC 606-10-25-14 permits a series of distinct goods or services to be treated as a single performance obligation when the series criterion in ASC 606-10-25-15 is met: each distinct good or service in the series must be substantially the same, and each one must meet the criteria for over-time revenue recognition using the same method of measuring progress toward completion. Daily cleaning services that are each substantially identical and each transferred using the same time-elapsed measure satisfy that test, so the whole series is bundled into one performance obligation with a single measure of progress applied across it, rather than treating every day as its own separately recognized obligation. Recognizing revenue day by day as a series of individually completed obligations is exactly the outcome the series guidance is designed to simplify away, since it would produce the same pattern of recognition through far more record-keeping. Whether the customer pays in a single lump sum upfront or in installments over time is a matter of transaction price and payment timing, not a condition for whether the series qualifies as one performance obligation; the series test is about the nature and pattern of the underlying services, not the payment structure. Contract length is likewise irrelevant to the series criterion — nothing in ASC 606-10-25-14 or 25-15 limits it to arrangements of one year or less.
Source: FASB Accounting Standards Codification: ASC 606-10-25-14 and 25-15, Revenue from Contracts with Customers — Series of Distinct Goods or Services