Cable 4 U Ltd. enters into a two-year contract with the City Hospital to provide a 24/7 on demand cable television service to its patients. Cable 4 U Ltd. determines that its cable television service is satisfied over time because the patients of City Hospital receive and consume the benefit from the service as it is provided. Since Cable 4 U Ltd.'s efforts are expended evenly throughout the performance period, it uses a time-based measure to measure its progress. Which one of the following is correct? 1. The identification of a series of distinct goods or services as a single performance obligation is an accounting policy choice because the series requirement only exists to simplify the accounting for when an entity provides the same good or service over time. 2. Cable 4 U Ltd. concludes that its contract with the City Hospital does meet the series requirement (i.e., the contract is a single performance obligation) as long as it can document that the television programming is consumed evenly throughout the two-year period. 3. The City Hospital contract meets the series requirement because each of the distinct increments of service - a day - is substantially the same, satisfied over time and Cable 4 U Ltd. uses the same measure of progress to recognize revenue for its television service.
Answer (1)
The subject of this question deals with the concept of identifying performance obligations within a contract from an accounting perspective, specifically within the context of revenue recognition.
The scenario involves Cable 4 U Ltd. and its contract with the City Hospital to provide a continuous cable television service over a two-year period. The question is about determining the proper way to recognize revenue from such a contract.
Understanding the Series Requirement:
To properly account for revenue from this contract, you must understand the 'series requirement' in revenue recognition. The series requirement simplifies accounting by allowing a series of distinct but similar goods or services to be treated as a single performance obligation if certain criteria are met.
Explanation of Options:
Option 1: This suggests that identifying a series of distinct goods or services as a single performance obligation is merely an accounting policy choice. However, the series requirement is not just for simplification; it also ensures consistent revenue recognition when certain conditions are met.
Option 2: This states that the contract meets the series requirement if there is documentation showing that the service is consumed evenly. However, it's necessary to show that each increment of service (e.g., each day of service) is distinct, even if consumed evenly.
Option 3: This accurately reflects the series requirement. Each day of television service is distinct yet substantially the same, and is provided continuously over time. Since Cable 4 U Ltd. uses the same measure of progress to recognize revenue each day, this option correctly identifies that the contract meets the series requirement.
Conclusion:
Therefore, the correct choice is Option 3.
The contract with the City Hospital meets the series requirement because each daily increment of service is substantially the same, satisfied over time, and Cable 4 U Ltd. applies a consistent measure of progress to recognize revenue throughout the service period.
This understanding ensures that the entity appropriately recognizes revenue over the service period, aligning with the principles of revenue recognition under accounting standards.
