Hubbell Policies

Hubbell Example #8 – Allocating the Purchase Price – Installation

Background: Hubbell enters into a contract with a customer to deliver and install a piece of equipment for $1,000,000. Hubbell determines both the system and installation are separate performance obligations. Hubbell does not typically sell the equipment and installation separately, therefore no stand-alone selling price data is available. Hubbell estimates the total cost plus margin of the equipment will be $900,000 and cost plus margin of the installation is $100,000. Conclusion: Since there are no observable inputs for stand-alone selling price Hubbell elected to utilize the expected cost plus margin approach to determine relative fair value. Based on the total cost of both performance obligations Hubbell will allocate $900,000 of the sales price to the equipment and $100,000 to the installation services.

Allocation of Variable Consideration

Hubbell shall allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation if both of the following criteria are met: a. The terms of a variable payment relate specifically to Hubbell’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service). b. Allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with an amount that depicts the amount of consideration to which Hubbell expects to be entitled in exchange for transferring the promised goods or services to the customer. Otherwise, the variable consideration is allocated to all of the performance obligations within the contract. Hubbell shall recognize revenue when (or as) Hubbell satisfies a performance obligation by transferring a promised good or service to a customer. An asset is transferred when (or as) the customer obtains control of that asset. Hubbell must evaluate each performance obligation identified in the contracts and determine whether revenue should be recognized at a point in time or over time. The standard defines control of an asset as the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows that can be obtained directly or indirectly in a number of ways, including but not limited to: 5.0 Recognize Revenue when the business Satisfies a Performance Obligation

• Using the asset to produce goods or provide services (including public services) • Using the asset to enhance the value of other assets • Using the asset to settle liabilities or reduce expenses • Selling or exchanging the asset • Pledging the asset to secure a loan •Hol ding the asset

Performance Obligations Satisfied Over Time

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