Revenue Recognition (ASC 606)
ASC 606 provides a five-step framework for recognizing revenue from contracts with customers, replacing industry-specific guidance with a single, principles-based model.
Explanation
The ASC 606 revenue recognition model requires entities to identify the contract, identify performance obligations, determine the transaction price, allocate the price to performance obligations, and recognize revenue as obligations are satisfied. This applies to virtually all contracts with customers except leases, insurance, and financial instruments.
The standard emphasizes the transfer of control rather than transfer of risks and rewards. Revenue is recognized either at a point in time or over time, depending on when the customer obtains control of the promised goods or services. Variable consideration, contract modifications, and principal-versus-agent determinations are common exam topics.
Key Points
- •Five-step model: identify contract, identify obligations, determine price, allocate price, recognize revenue
- •Revenue recognized when control transfers to the customer
- •Variable consideration estimated using expected value or most likely amount
- •Contract costs may be capitalized if expected to be recovered
Exam Tip
FAR heavily tests the five-step model. Know how to identify separate performance obligations and when revenue is recognized over time versus at a point in time.
Frequently Asked Questions
Related Topics
Construction Contracts and Long-Term Contracts
Long-term construction contracts recognize revenue over time using the percentage-of-completion method when progress can be reliably measured, typically based on costs incurred relative to total estimated costs.
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
Financial Instruments
Financial instruments include cash, equity investments, debt investments, derivatives, and other contracts that give rise to financial assets and financial liabilities.
Test your knowledge
Practice scenario-based questions on this topic with detailed explanations.