Knowledge Hub · Guide
ASC 606: the five steps, worked through a real contract.
ASC 606 is the US standard for revenue recognition from contracts with customers. Its five steps are easy to list and harder to apply to a contract with equipment, installation and three years of service on one signature. This guide works one such contract through every step, with the numbers shown.
- 1Contract
- 2Obligations
- 3Price
- 4Allocate
- 5Recognize
The five steps
Contract, obligations, price, allocation, timing.
The order matters: each step uses the answer to the one before it.
- 01
Identify the contract
An agreement with commercial substance, approved by both parties, whose payment terms you can identify and whose collection is probable.
- 02
Identify the performance obligations
Each good or service the customer can benefit from on its own, and that is separately identifiable in the contract.
- 03
Determine the transaction price
What you expect to be entitled to: the fixed amount, less discounts, plus variable amounts you can estimate without a likely reversal.
- 04
Allocate the price
Split the transaction price across the obligations in proportion to their standalone selling prices.
- 05
Recognize revenue
When, or as, each obligation is satisfied: at a point in time when control passes, or over time as the work is done.
The worked contract
One signature, three obligations, one allocation.
A distributor buys a packaging line, its installation and a 36-month service plan for $171,000, a discount on the list price of each. The discount is not given to one line: it is spread across all three by their standalone selling prices.
- Standalone selling price
- $190,000 in total: what each item sells for on its own, from your own price history.
- Allocation ratio
- $171,000 ÷ $190,000 = 0.9, applied to each obligation's standalone price.
- Timing
- Equipment on delivery, installation on completion, service ratably at $1,125 a month.
- 1Contract
- 2Obligations
- 3Price
- 4Allocate
- 5Recognize
Over time or at a point
When revenue is recognized over time, and when at a point.
An obligation is satisfied over time if any one of these is true. If none is, it is satisfied at the point control passes.
- The customer consumes it as you perform
- A service plan, hosting, a monthly support retainer.
- You create or enhance an asset the customer controls
- Building on the customer's own site, improving equipment they already own.
- No alternative use, and a right to payment
- A made-to-order item you could not sell to anyone else, with a contractual right to be paid for work done to date.
- Otherwise, at a point in time
- Control passes when the customer has title, physical possession, the risks and rewards, and has accepted it.
When the contract changes
A change is a new contract, or part of the old one.
| Treated as a separate contract | Treated as part of the existing contract | |
|---|---|---|
| When | Distinct goods or services are added at their standalone selling price | The added items are not distinct, or not priced at standalone selling price |
| Effect | The original contract is untouched | The remaining price is reallocated, prospectively or with a catch-up |
| Example | Two more service years at the current list rate | A price cut on the remaining service months after a dispute |
Who decides
The policy is your accountant's.
Software can apply a policy the same way every period and show its working. Whether a policy and its results meet ASC 606 is a judgment your accountant makes, and your auditor checks.
Your policy
Which obligations you identify, how you set standalone selling prices, which method each one uses.
Applied the same way
Schedules computed from that policy on every contract, with the allocation and the method shown.
Signed off each close
Nothing posts to the general ledger until your accountant has approved the period.
FAQ
ASC 606, step by step, run end to end.
What are the five steps?
Identify the contract with the customer; identify the performance obligations in it; determine the transaction price; allocate that price to the obligations by their standalone selling prices; and recognize revenue when, or as, each obligation is satisfied. Each step uses the answer to the one before it.
How is the price allocated?
In proportion to each obligation's standalone selling price, the price you would charge for it on its own. If a $171,000 contract holds obligations with standalone prices of $130,000, $15,000 and $45,000, the ratio is 0.9, and they are allocated $117,000, $13,500 and $40,500. A discount is spread across all of them unless there is evidence it belongs to only some.
When is revenue recognized over time vs at a point?
Over time when the customer consumes the benefit as you perform, when you create or enhance an asset the customer controls, or when what you make has no alternative use and you have a right to payment for work done to date. Otherwise revenue is recognized at the point control passes to the customer.
How do contract changes affect it?
A modification that adds distinct goods or services at their standalone selling price is a separate contract, and the original is untouched. Otherwise the change is accounted for as part of the existing contract: the remaining transaction price is reallocated, either going forward or with a cumulative catch-up, depending on whether the remaining items are distinct.
Who decides the policy?
Your company, through its accountant. Revenue recognition policy (the obligations you identify, how you set standalone selling prices, the method for each) is an accounting judgment, checked by your auditor. Software such as Apex computes schedules from that policy, shows its working and waits for your accountant to sign off each close; it does not make the judgment for you.
Related in Apex
See Apex work on your own quote to cash.
Thirty minutes on one workflow, with your own quotes, orders or invoices. You leave with a view of where Apex fits, and an honest answer if the sequencing is wrong and you should fix something else first.
Your pricing, approval and billing rules are your advantage, and they stay yours. Apex is configured to the way you sell, make and bill. You are not handing over a playbook or fitting into a template.