Hubbell Policies

Hubbell Example #9 – Recognize Revenue – Alternative Use and Right to Payment

Performance Obligations Satisfied at a Point In Time If a performance obligation does not meet the criteria above to be satisfied over time, then it shall be recognized at a point in time. To determine the point in time at which a customer obtains controls of the promised asset and Hubbell satisfies a performance obligation, Hubbell should consider the following indicators: • Hubbell has a present right to payment for the asset — If a customer presently is obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange. • The customer has legal title to the asset — Legal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If Hubbell retains legal title so lely as protection against the customer’s failure to pay, those rights of Hubbell would not preclude the customer from obtaining control of an asset. • Hubbell has transferred physical possession of the asset —The customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that Hubbell controls. Conversely, in some bill-and-hold arrangements, Hubbell may have physical possession of an asset that the customer controls. All bill-and-hold arrangements must be approved by the Corporate Controller’s Office. • The customer has the significant risks and rewards of ownership of the asset — The transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, Hubbell shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. For example, Hubbell may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset. Background: Hubbell enters into a contract with a customer to deliver a made-to-order piece of equipment to an OEM. The equipment is customized based on the OEM’s specific specifications. Hubbell does not have any customers in which they can re-direct the finished piece of equipment to without significant modification. Hubbell performs a detail analysis of the equipment bill of material (BOM). In Hubbell’s analysis, each line item is considered whether it could be re-used or would need to be scrapped and also how much Labor/Overhead would be incurred to re-direct the asset. The cost of the equipment is $600,000 and the total Sales price is $1,000,000 (meaning $400,000 of profit). During the detailed BOM analysis it was determined that the scrapped materials and labor incurred to re-purpose the product would cost $350,000. Hubbell’s termination language states that if a customer wants to terminate the contract it must obtain a written response from Hubbell and will be charged costs incurred to date on the project. Conclusion: The re-purpose of the product would cost Hubbell 87.5% ($350,000/$400,000) of its margin on the sale. As such, Hubbell concluded the product does not have an alternative use. However, the company does not meet the right to payment criteria as Hubbell will not obtain cost plus a reasonable margin (as the contract only includes cost incurred to date). As such, Hubbell has concluded the contract should be recognized at a point in time.

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