In a service contract with multiple performance obligations and variable consideration, what is the proper revenue recognition approach?

• A. Recognize revenue upfront for all obligations and adjust later for variable consideration.
• B. Recognize only when the contract is fully satisfied; ignore variable consideration.
• C. Allocate price to one dominant obligation and recognize all revenue then.
• D. Identify obligations, allocate transaction price to each obligation, recognize revenue as each obligation is satisfied, applying the constraint to variable consideration.

Answer: (D)

When a contract has multiple performance obligations and variable consideration, you recognize revenue as you satisfy each promised service or good, not all at once. The process starts with identifying each obligation separately and determining the total transaction price, which includes fixed amounts plus an estimate of variable consideration. Importantly, you apply a constraint to the variable portion: you only include as revenue the amount of variable consideration that is highly probable not to be reversed later. Then you allocate the transaction price to each obligation based on stand-alone selling prices (or an appropriate method) and recognize revenue for each obligation as it is satisfied, which could be over time if control transfers gradually or at a point in time if control passes at a specific moment. This approach ensures revenue reflects the transfer of each promised right and avoids overstating income due to premature recognition or ignores of the variability.