Chartered Financial Analyst Level 1

Under the converged revenue recognition model (IFRS 15 / ASC 606) an entity recognizes revenue when (or as) it satisfies a performance obligation by transferring control of a promised good or service to the customer. The overall process is the five-step model: (1) identify the contract, (2) identify performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue when (or as) each performance obligation is satisfied. A key constraint on recognizing variable consideration is that only amounts that are "probable" (i.e., highly probable that they will not be subsequently reversed) may be included in the transaction price. Thus the requirement that recognized revenue be highly unlikely to be reversed is a core part of the standard’s recognition criteria for uncertain (variable) consideration.

Why the other choices are incorrect:

• A (cash is received): The standard is based on transfer of control, not on receipt of cash; revenue can be recognized before cash is collected if the performance obligation has been satisfied and collection is probable.
• C (all performance obligations within a contract have been met): The model allows revenue recognition as each identified performance obligation is satisfied (either over time or at a point in time). It is not necessary to wait until all performance obligations in a contract are satisfied before recognizing revenue for those already completed.