Investor Presentaiton
Note 3. REVENUE RECOGNITION
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services
have transferred to our customers. Control is transferred when the customer has the ability to direct the use of and obtain
benefits from the goods or services. Sales are measured at the amount of consideration the Company expects to be paid in
exchange for these products or services.
The majority of the Company's sales agreements contain performance obligations satisfied at a point in time when title and
risk and rewards of ownership have transferred to the customer. Sales recognized over time are less than 5% of Eaton's
Consolidated Net Sales. Sales recognized over time are generally accounted for using an input measure to determine progress
completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For
agreements with multiple performance obligations, judgment is required to determine whether performance obligations
specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes.
In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in
separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by
contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the
extent it is not probable that a significant reversal of cumulative sales will occur. Additionally, contracts can be modified to
account for changes in contract specifications, requirements or sale price. The effect of a contract modification on the sales
price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a
cumulative catch-up basis.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time
between when revenue is recognized and when payment is due is not significant. Eaton does not evaluate whether the selling
price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes
collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are
included in Cost of products sold.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the
time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market
conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets
Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume
levels. Accrued rebates of $400 million and $327 million as of December 31, 2022 and 2021, respectively, are generally paid
annually and were included in Other current liabilities. Returns are estimated at the time of the sale primarily based on historical
experience and are recorded gross on the Consolidated Balance Sheet.
Sales commissions are expensed when the amortization period is less than a year and are generally not capitalized as they
are typically earned at the completion of the contract when the customer is invoiced or when the customer pays Eaton.
Sales of products and services varies by segment and are discussed in Note 17.
In the Electrical Americas segment, sales contracts are primarily for electrical components, industrial components, power
distribution and assemblies, residential products, single phase power quality and connectivity, three phase power quality, wiring
devices, circuit protection, utility power distribution, power reliability equipment, and services that are primarily produced and
sold in North and South America. The majority of the sales in this segment contain performance obligations satisfied at a point
in time either when we ship the product from our facility, or when it arrives at the customer's facility. However, certain power
distribution and power quality services are recognized over time.
In the Electrical Global segment, sales contracts are primarily for electrical components, industrial components, power
distribution and assemblies, single phase and three phase power quality, and services that are primarily produced and sold
outside of North and South America, as well as hazardous duty electrical equipment, emergency lighting, fire detection,
intrinsically safe explosion-proof instrumentation, and structural support systems that are produced and sold globally. The
majority of the sales contracts in this segment contain performance obligations satisfied at a point in time either when we ship
the product from our facility, or when it arrives at the customer's facility. However, certain power distribution and power
quality services are recognized over time.
In the Aerospace segment, sales contracts are primarily for aerospace fuel, hydraulics, and pneumatic systems for
commercial and military use, as well as filtration systems for industrial applications. These sales contracts are primarily based
on a customer's purchase order, and frequently covered by terms and conditions included in a long-term agreement. In this
segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or
when it arrives at the customer's facility. Our military contracts are primarily fixed-price contracts that are not subject to
performance-based payments or progress payments from the customer.
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