Starbucks and Five-Step Revenue Recognition Model

Starbucks and Five-Step Revenue Recognition Model
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Starbucks and Five-Step Revenue Recognition Model
The five-step revenue recognition model are new standards that were introduced by the Financial Accounting Standards Board to assist in the recognition of revenue from customers who have contract with a given organization. Notably, the model was intended to align revenue recognition with the contract progress. In step 1, the accountant is required to identify the contract. The model requires an accountant to combine all contracts into one contract when accomplishing financial reporting. In step 2, the accountant should detail the performance obligations in the contracts. After the identification of the contract, the accountant is required to identify obligation and use them as estimate for revenue recognition.
In step 3, the accountant is required to determine the transaction price. Regarding this, the accountant estimates the revenue based on expected consideration as opposed to relying on the actual value of the contract. In step 4, the accountant is expected to allocate the transaction price. While allocation the transaction price, the accountant can use residual approach, adjusted market approach, or expected cost plus margin approach to allocate transaction price. In step 5, the accountant recognizes revenue. The revenue recognition is based upon the satisfaction of the performance obligations detailed in the contract. The two main approaches to revenue recognition are revenue recognition over time and the recognition at a given point in time.
Application of the five-steps model by Starbucks is evident from the way revenue realized from leases is accounted. In its 10-K, Starbucks apply the five step model. The consolidated revenues that are presented in its financial report include intercompany elimination for the company and its subsidiaries for products sales, royalty, and fees to licensees (Starbucks, 2022). Also, the store revenue exclude taxes that are collected from the customers and remitted to tax authorities. In regards to company-operated store revenues, Starbucks recognize revenue once customer has tendered payment at the point of sale as an indication that the performance obligation has been met. However, the sales tax and other forms of tax that are remitted to authorities are excluded from the store revenues as detailed in step 3 of the model.
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