Revenue Recognition Standard ASC 606

January 02, 2022

Is it your first time issuing financial statements? Have you adopted new standards yet? Follow these five steps to evaluate every revenue stream, and learn how to implement the new standards of the revenue recognition principle.


If you are issuing financial statements under Generally Accepted Accounting Principles, also known as GAAP, you have probably implemented Accounting Standards Codification (ASC) 606 related to revenue recognition. But, let me just go over what the new revenue recognition model is in case it will be your first time issuing financials or for some reason you did not adopt the new standard yet.  ASC 606 applies to most contracts with customers with some exceptions.  This revenue recognition model is based on a control approach rather than a risk and rewards approach used in the prior model.

Here are the 5 steps that an entity that has contracts with customers will have to evaluate for every revenue stream to correctly implement ASC 606.

Step 1: Identify the contract with the customer: A contract is an agreement between two parties that creates enforceable rights and obligations. In order to qualify as a legally enforceable contract, it must meet the following requirements:

  • It has commercial substance
  • Both parties have approved the contract
  • The entity can identify each party’s rights regarding the goods and services
  • The entity can identify the payment terms
  • It is probable that the entity will collect the consideration that it is entitled to

Step 2: Identifying performance obligations: A performance obligation is a promise to transfer to the customer a good or service (or a bundle of goods or services) that is distinct. Identifying separate performance obligations in a contract is essential to correctly applying the revenue recognition model. To identify all performance obligations management should ask itself: 

  • Can the customer directly benefit from these goods and services on a stand-alone basis? and
  • Are these goods and services separately identifiable?

if the answer is yes to both of these questions, then we have a separate performance obligation.

if one of the answers are no, the entity must reevaluate, combine good and services that are not distinct, and start asking the questions again until both answers are yes.

Step 3: Determining transaction price: the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. There can be multiple components to the transaction price: there can be fixed consideration, variable considerations, non-cash considerations, and a financing component to name just a few. All of these components need to be considered carefully and many times determining the transaction price involves judgement.

Step 4: Now that we determined the transaction price the fourth step is Allocating the transaction price: An entity allocates the total consideration for the contract to each performance obligation on a relative standalone selling price basis or other supportable rational. Standalone selling price means that if the service is sold separately, how much would the seller receive in a similar circumstance. If not directly observable, there are different approaches management can use to allocate the transaction price.

Step 5: And finally the last step, step number 5, recognizing revenue.

Management should evaluate if the transfer of control of the goods and service happens over time or at a point in time.

Again, I would like to remind you that management has to go through the 5 step analysis for every revenue stream, and possibly every contract, and must document this process.

I also wanted to bring up that there is an alternative accounting basis to GAAP called FRF for SMEs, otherwise called Financial Reporting Framework for Small and Medium Sized Entities. In the FRF for SME’s, the  revenue recognition principle is different: in this case, revenue is recognized when performance is achieved and collection is reasonably assured.  FRF for SME’s can be used by small or medium size companies that are not going public, investors have easy access to management and does not have complicated transactions.

Please contact us if you have any questions, we are happy to help.

About Erika Ballo

Erika Ballo is in the Private Client Services Group with over five years in both public and private experience.

More in This Series

Understanding the Financial Closing Process

Standard policies and procedures for closing the books is essential in creating comparable month over month reporting. Learn what to consider when constructing a formalized quarterly and annual financial closing process.

How to Find Investors for Your Business

Looking for quality investors for your new company is a challenging task. Learn how to utilize your existing network to be at the top of an investor’s mind.

Options to Help Finance a New Business

Learn more about where to get financing during the early stages of a new business.

Starting Your Business as a Sole Proprietorship

Discover the considerations and challenges when starting your business as a sole proprietorship.

S Corporation vs. C Corporation: Breaking Down Different Tax Requirements for New Corporations

Choosing the entity type of your new business can be complex and overwhelming. Learn the differences in tax requirements and qualifications and see which is the best fit for you.

Operating and Managing Your Business to Minimize Your Tax Bill

Accurate and thorough recordkeeping can save your business a lot of time and money. Discover the key areas a knowledgeable tax professional can advise you on in this new tax environment.

Tax Exit Strategies When Selling Your Business

Keeping good books and financial statements can help you to secure a deal when selling your business. A qualified tax professional and advisor can help you perform the due diligence required prior to a successful sale.

Internal Controls for Inventory, Equipment and Assets

There are many important procedures to consider when setting up internal controls for your new business. Learn more about how detailed recording and periodic checks and balances can help you avoid discrepancies.

Libor Rate Changes and the Future of Your Business

An explanation of plans to phase out of the LIBOR rate, and the important discussions and actions you need to take now to prepare your business.

Going Concern and How It will Impact Your Financial Statement

A spotlight on going concern, and the steps to follow when evaluating your small business and its operating and commitment obligations.

Driving Success with Financial Management

Implementing an accounting system for your business will enable more success and profit maximization. Follow these steps to create a solid foundation for the financial management of your business.

Tax Considerations When Starting Your New Business

Starting a new business can be difficult and overwhelming, and filing your first tax return can seem daunting. Find out how you can make this process go more smoothly.

How to Have Good Internal Controls for Cash Disbursements

How can we have good controls over cash disbursements in a small to mid-sized Company? The first step is your vendor setup. You can go through similar steps for other risks you identify such as receiving invoices, payment approval, and payments.

What are the 5 Components of Internal Controls

Creating internal controls not only prevents fraud and loss of assets, but it also improves the accuracy of financial records and helps the business run smoothly.

ASC 842: Implementing the New Lease Standards

There are two types of leases under ASU 842, finance leases and operating leases. The criteria to classify a lease as finance or operating lease is similar to current lease standards, only less rigid, therefore requiring more judgement.

Finance a New Business

Learn where to acquire financing during the early stages of a new business.