ASC 606 without the footnotes

ASC 606 is 5 steps, and the difficulty is almost never the standard. It is that a real contract contains several performance obligations of different shapes and the allocation between them has to be defensible. This guide works one contract end to end.

The 5 steps

1. Identify the contract with the customer.
2. Identify the performance obligations in it.
3. Determine the transaction price.
4. Allocate that price to the obligations.
5. Recognise revenue as each obligation is satisfied.

Identifying obligations

An obligation is a promise of a distinct good or service. The practical test is whether the customer could benefit from it on its own: a platform licence and an implementation service usually pass, a licence and its own hosting usually do not.

Allocating the price

Price is allocated in proportion to standalone selling price. Where an obligation has no observable SSP it is estimated, and the estimate is the part an auditor will test, so the method has to be recorded alongside the number, not reconstructed later.

Recognising as satisfied

A subscription obligation is satisfied ratably, a usage obligation as the usage occurs, and a milestone on acceptance. One contract therefore produces 3 different recognition patterns from one allocation, which is exactly why the schedule is worth generating rather than maintaining by hand.