ASC 606
Active
Revenue from Contracts with Customers
Governs revenue recognition from contracts with customers using the five-step model, converged with IFRS 15.
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Conceptual Framework Linkage
Revenue depicting the transfer of control
ASC 606's core principle: an entity recognises revenue to depict the TRANSFER of promised goods or services to customers in an amount that reflects the CONSIDERATION the entity expects to be entitled to in exchange – a genuinely control-based, single unified model replacing the older, more fragmented industry-specific approach that preceded it.
The single most converged major standard in this entire library
ASC 606 and IFRS 15 emerged from a genuine JOINT FASB-IASB project, issued SIMULTANEOUSLY in 2014 with substantively IDENTICAL wording and structure. This makes ASC 606 the clearest example anywhere in the Codification of TRUE convergence – the comparison section is correspondingly SHORT, since there is very little to compare.
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Scope & Applicability
Contracts with customers, broadly
ASC 606 applies to all contracts with CUSTOMERS to transfer goods or services in exchange for consideration – EXCLUDING leases (ASC 842), insurance contracts, financial instruments, guarantees (other than product/service warranties), and certain nonmonetary exchanges between entities in the same line of business to facilitate sales to third parties.
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The Five-Step Model – Overview
The complete revenue recognition framework in five steps
StepDescription
1Identify the contract with a customer
2Identify the performance obligations in the contract
3Determine the transaction price
4Allocate the transaction price to the performance obligations
5Recognise revenue when (or as) each performance obligation is satisfied
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Step 1 – Identify the Contract
A contract exists when all five criteria are met
A contract exists only when: (1) the parties have APPROVED the contract and are committed to perform; (2) each party's rights can be IDENTIFIED; (3) payment terms are IDENTIFIABLE; (4) the contract has COMMERCIAL SUBSTANCE; and (5) it is PROBABLE that consideration will be collected. If any criterion is NOT met, the contract does not exist under ASC 606 and no revenue can be recognised until the criterion is satisfied.
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Step 2 – Identify Performance Obligations
Distinct goods or services promised
A performance obligation is a PROMISE to transfer a DISTINCT good or service. A good or service is distinct if: (1) the customer can benefit from it on its own or together with other readily available resources; and (2) the promise to transfer it is separately identifiable from other promises in the contract. A bundle of goods or services that are not distinct is combined into a SINGLE performance obligation.
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Step 3 – Determine the Transaction Price
The amount of consideration expected
The TRANSACTION PRICE is the amount of consideration an entity expects to be entitled to in exchange for transferring the promised goods or services. It includes fixed amounts, variable amounts (subject to the constraint in Section 7), significant financing components (Section 8), non-cash consideration, and consideration payable to the customer.
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The Variable Consideration Constraint
Only include amounts expected to be entitled
When consideration is VARIABLE (e.g., rebates, refunds, incentives, performance bonuses), the entity estimates the amount it expects to be entitled to – INCLUDING only amounts that are NOT likely to be significantly reversed when uncertainty resolves. This "CONSTRAINT" prevents premature recognition of revenue that may need to be repaid to the customer.
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Significant Financing components
When payment timing creates a financing arrangement
If the contract includes a SIGNIFICANT financing component – where the customer pays significantly before or after the entity transfers the goods or services – the entity adjusts the transaction price for the TIME VALUE OF MONEY. The entity discounts the promised consideration to its present value if the customer pays in advance, or accretes the promised consideration if the customer pays after delivery.
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Step 4 – Allocate the Transaction Price
Proportionally to standalone selling prices
The transaction price is ALLOCATED to each performance obligation based on that obligation's RELATIVE STANDALONE SELLING PRICE – the price at which the entity would sell the good or service separately to a customer. When standalone selling prices are not directly observable, the entity estimates them using adjusted market assessment, expected cost plus margin, or residual approach methods.
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Step 5 – Recognise Revenue
When or as the customer obtains control
Revenue is recognised WHEN (at a point in time) or AS (over time) the customer obtains CONTROL of the promised good or service. Control transfers over time if any of three criteria are met: (1) the customer simultaneously receives and consumes the benefits as the entity performs; (2) the entity's performance creates or enhances an asset that the customer controls as it is created; or (3) the entity's performance does not create an asset with alternative use and has an enforceable right to payment for performance completed to date.
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Licensing – Right to Access vs Right to Use
A specific license recognition model
Licenses are classified as either a RIGHT TO ACCESS the intellectual property (recognised over time, because the customer simultaneously receives and consumes the benefit) or a RIGHT TO USE the intellectual property (recognised at a point in time, because the customer obtains control at the license transfer date). This distinction is specific to ASC 606 and IFRS 15 and was central to the convergence project.
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Principal vs Agent Considerations
Whether the entity controls the good before transfer
An entity must determine whether it acts as a PRINCIPAL (controls the good/service before transfer – recognises GROSS revenue) or as an AGENT (facilitates transfer on behalf of another party – recognises NET revenue equal to the fee or commission retained). This determination requires evaluating who controls the promised good or service – the entity or the customer – before it is transferred to the customer.
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Warranties – Assurance-Type vs Service-Type
Two types of warranties under ASC 606
ASSURANCE-TYPE warranties are promises that the product or service conforms to agreed-upon specifications – these are NOT separate performance obligations, and the cost of providing them is accounted for under ASC 460/ASC 326. SERVICE-TYPE warranties are promises to provide additional services beyond assurance – these ARE separate performance obligations, and a portion of the transaction price is allocated to them and recognised as revenue over the warranty period as services are provided.
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Contract Costs – Cross-Reference to ASC 340-40
Costs to obtain and fulfil contracts
ASC 606 cross-references ASC 340-40 for the treatment of costs to OBTAIN a contract (such as sales commissions) and costs to FULFIL a contract (such as setup or installation costs). Incremental costs of obtaining a contract are capitalised if expected to be recovered; costs of fulfilling a contract are capitalised if they relate directly to a contract, generate or enhance resources that will be used in satisfying future performance obligations, and are expected to be recovered.
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Worked Example – the Variable Consideration Constraint
Estimating a rebate obligation
Example: Volume rebate constraint
An entity sells $2,000,000 of products to a customer during the year. The contract includes a 3% rebate if total annual purchases exceed $1,800,000. The entity estimates an 80% probability of achieving the rebate threshold.
Variable consideration = $2,000,000 × 3% = $60,000. Applying the CONSTRAINED estimate at the expected value ($60,000 × 80%) = $48,000 included in the transaction price. Total transaction price = $2,000,000 − $48,000 = $1,952,000. The remaining $12,000 is not recognised until uncertainty resolves.
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Worked Example – Over-Time Recognition
Revenue recognised as work progresses
Example: Construction contract recognised over time
An entity has a $3,000,000 construction contract with a customer. The contract meets the over-time criteria because the customer controls the asset as it is constructed. By year-end, the entity has completed 35% of the work. Input method (costs-to-cost): costs incurred to date are $840,000; total estimated costs are $2,400,000.
Percentage complete = $840,000 / $2,400,000 = 35%. Revenue recognised to date = $3,000,000 × 35% = $1,050,000. The entity recognises this $1,050,000 as revenue in the current period, even though the asset is not yet complete or transferred to the customer.
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Worked Example – Principal vs Agent
Determining gross vs net revenue presentation
Example: E-commerce platform
An e-commerce platform sells products from third-party merchants. The platform sets the price to the customer, takes possession of the goods briefly for fulfilment, but has NO inventory risk. The platform retains a 10% commission from each sale.
The platform acts as an AGENT, not a PRINCIPAL – it does NOT control the goods before transfer. Revenue recognised = the 10% COMMISSION FEE only (NET revenue). The gross amount collected from customers is NOT recognised as revenue; it is included in the settlement of the payable to the merchant.
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Disclosure Requirements
What ASC 606 requires
Disaggregation of revenue by category (geography, product, timing of recognition)Contract balances: receivables, contract liabilities, contract assetsPerformance obligations description and transaction price allocationRemaining performance obligations and when revenue will be recognisedSignificant judgments and estimates in applying the five-step model
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Identification of performance obligations within bundled arrangementsPrincipal vs agent determinationWhether the contract meets Step 1 existence criteriaClassification of licenses as right to access or right to use
SIGNIFICANT ESTIMATES
Standalone selling prices for allocationVariable consideration and the constraintProgress measurement for over-time recognitionTransaction price including financing components
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ASC 606 vs IFRS 15 – the Rare Remaining Differences
Comparison – ASC 606 vs IFRS 15
FeatureUS GAAP (ASC 606)IFRS (IFRS 15)
Core modelIdentical five-step modelIdentical five-step model
Exposure draft differencesNearly eliminated through joint projectSame converged outcome
Practical differencesMinimal – primarily in effective date transition provisionsSame minimal differences
ASC 606 and IFRS 15 are SUBSTANTIVELY IDENTICAL. The few remaining differences are primarily transitional provisions and minor scope nuances, not substantive recognition or measurement differences.
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Statement Mapping
Where every ASC 606 event lands
EventStatement(s) affectedNotes
Point-in-time revenue recognitionBS ISContract asset/liability; revenue recognised
Over-time revenue recognitionBS ISContract asset for work in progress
Variable consideration refundBS ISContract liability adjustment; refund expense
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Related Topics
Cross-reference map
TopicConnection
ASC 605Legacy revenue recognition – superseded by ASC 606 except for limited transitional arrangements
ASC 340Other Assets – contract costs capitalisation under ASC 340-40
IFRS 15IFRS Revenue from Contracts with Customers – the converged twin of ASC 606
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Quick-Reference Glossary
Performance obligation
A promise in a contract to transfer a distinct good or service to the customer.
Contract asset
An entity's right to consideration in exchange for goods or services transferred to the customer when that right is conditional on something other than the passage of time.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows