The Company follows ASC 606 “Revenue from Contracts with Customers” to determine the recognition of revenue. This standard requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenues. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

Espey Mfg. & Electronics Corp.

Notes to Financial Statements

Note 3. Revenue, Continued

Significant judgment is required in determining the satisfaction of performance obligations. Revenues from our performance obligations are satisfied over time using the output method which considers the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically shipping point. Revenue is recognized when, or as, the customer takes control of the product or services. The output method best depicts the transfer of control to the customer as the output method represents work completed. Control is typically transferred to the customer at the shipping point as the Company has a present right to payment, the customer has legal title to the asset, the customer has the significant risks and rewards of ownership of the asset, and in most instances the customer has accepted the asset.

Total revenue recognized for the twelve months ended June 30, 2022 based on units delivered totaled $26,931,949 compared to $22,973,507 for the same periods in fiscal year 2021. Total revenue recognized for the twelve months ended June 30, 2022 based on milestones achieved totaled $5,172,825 compared to $4,761,091 for the same periods in fiscal year 2021.

The Company offers a standard one-year product warranty. Product warranties offered by the Company are classified as assurance-type warranties, which means, the warranty only guarantees that the good or service functions as promised. Based on this, the provided warranty is not considered to be a distinct performance obligation. The impact of variable consideration has been considered but none identified which would result in the adjustment of the transaction price as of June 30, 2022. Our payment terms are generally 30-60 days.

Contract liabilities were $3,384,474 and $3,077,605 as of June 30, 2022 and 2021, respectively. The increase in contract liabilities is primarily due to the advance collection of cash on specific contracts, offset in part, by revenue recognized. Revenue recognized, that was in contract liabilities in the beginning of the fiscal year, approximated $1,160,000 for the twelve months ended June 30, 2022. The Company used the practical expedient to expense incremental costs incurred to obtain a contract when the contract term is less than one year.

The Company’s backlog at June 30, 2022 totaling $76.8 million is expected, based on expected due dates, to be recognized in the following fiscal years: 46% in 2023; 43% in 2024, and 11% in 2025.