What is ASC 606?
ASC 606 is the US accounting standard for revenue from contracts with customers, issued by the FASB and converged with IFRS 15. Under it, a company recognises revenue when control of a promised good or service passes to the customer, at the amount it expects to be entitled to, by following 5 steps.
The 5 steps
Every contract runs through the same 5 steps, in order, and each step's answer feeds the next.
- Step 1
Identify the contract
An approved agreement that creates enforceable rights and obligations, with payment terms and commercial substance, where collection is probable. - Step 2
Identify the performance obligations
Each distinct good or service the contract promises becomes an obligation of its own. - Step 3
Determine the transaction price
The amount the company expects to be entitled to, including a constrained estimate of anything variable, such as usage or rebates. - Step 4
Allocate the price
Split the transaction price across the obligations in proportion to each one's standalone selling price. - Step 5
Recognise revenue
As each obligation is satisfied, at a point in time or over time, its share of the price becomes revenue.
A worked example
In the illustrative example, Clevis Comfrey Inc signs contract CTR-2214: $480,000 for 24 months from 1 March 2026. Step 2 finds 4 obligations, and step 4 gives each 92.3% of its standalone selling price, because the 4 would sell separately for $520,000.
| Operation | Line | Figure |
|---|---|---|
| Platform, recognised ratably at $13,000 a month | $312,000 | |
| + | Implementation, recognised at a point in time in March | $84,000 |
| + | Premium support, recognised ratably at $2,400 a month | $57,600 |
| + | Training credits, recognised as each of 11 sessions is held | $26,400 |
| = | Transaction price | $480,000 |
By 30 June, step 5 has recognised $155,200 and $324,800 is still deferred, each figure traced to the obligation that earned it.
Common mistakes
Recognising revenue when the invoice is sent
An invoice moves receivables, not revenue. Revenue follows delivery: the implementation above was recognised in March, when it was done, and the platform fee is earned month by month.Allocating on the order form's line prices
A discounted bundle's line prices are a negotiation. Step 4 spreads the discount across every obligation by standalone selling price, unless evidence ties it to one.Handling every amendment the same way
An amendment that adds distinct goods at their standalone price is a separate contract. Otherwise the remaining price is re-allocated, prospectively when what is left is distinct, or with a cumulative catch-up when it is not.
How Verlix handles it
The Contract agent reads each obligation from the signed agreement and holds any term it is unsure of for a person to review. The Revenue agent builds a schedule for each obligation from the contract's terms and posts the journal entries, each naming the contract line behind it.
ASC 606 revenue recognitionRelated terms
Performance obligation
A distinct promise in a contract, the unit ASC 606 allocates and recognises.Standalone selling price
What each promise would sell for alone, the basis for allocating a contract's price.Deferred revenue
Billed or collected but not yet earned, a liability until the work is done.