Asc 606 Revenue Recognition: Everything You Need To Know Now

ASC 606 REVENUE
RECOGNITION
Everything you need to know now
TOPICS
03 Introduction
04 A revenue recognition primer
07 Identifying the contract
14 Identifying performance obligations
21 Determining the transaction price
31 Allocating the transaction price
39 Recognizing revenue
48 Disclosures
54 Cost capitalization
57 Effective dates and transition methods
61 Internal control over financial reporting
66 About the author
67 About Baker Tilly

INTRODUCTION
Revenue is a key performance indicator for every organization and a lifeline to achieving
success. It is no surprise that executives are working hard to understand how the new
revenue recognition accounting standard will affect their unique organizations.
Entities must apply the new standard and document their decision making process, with
significant financial statement disclosures required for those decisions. Even companies
that do not have a change in top line revenue may experience a difference in their
accounting process to reach that number. For many, implementing the new standard
will result in substantial modifications to their business systems, processes and internal
controls over financial reporting.
We recognize adopting the new standard will require a high level of effort from most
entities. The standard is complex and calls for increased judgment, documentation
and disclosures.
Baker Tilly can help. Our specialized professionals use a six step methodology to aid
you in assessing the impact, developing a plan and implementing this plan across your
organization.
It is our pleasure to provide this comprehensive eBook to help you understand revenue
recognition. We trust you will find value in all of the information and insights presented.
ALAN D. WHITMAN CHRISTINE M. ANDERSON

Chief Executive Officer Managing Partner of Assurance
Baker Tilly Virchow Krause, LLP Baker Tilly Virchow Krause, LLP
ASC 606 Revenue Recognition 3 Introduction

A REVENUE RECOGNITION PRIMER
View the recorded webinar on this topic
The Financial Accounting Standards software, while the IASB provided the
Board (FASB) and the International first comprehensive revenue recognition
Accounting Standards Board (IASB) guidance contained in IFRS. This is a
issued in May 2014 the long awaited significant and important event, as the
converged standard on revenue standard affects virtually every entity
recognition, Accounting Standards that prepares financial statements in
Update 2014-09 (Topic 606), Revenue accordance with United States generally
from Contracts with Customers accepted accounting principles (GAAP)
(affecting Accounting Standards or IFRS. Moreover, the standard impacts
Codification (ASC) 606) and International what is arguably the most important
Financial Reporting Standards (IFRS) number in financial statements: revenue.
15. The issuance culminated a lengthy
due process by the boards, consisting
of extensive outreach to users and
preparers of financial statements. During ...the standard affects
the course of the due process, the
original draft was changed significantly virtually every entity
in response to the comments of various
stakeholders.
that prepares financial
The objective of the project was

statements in accordance
to create a unified, principle-based
with generally accepted
standard on accounting for revenue
from customers. In doing so, the accounting principles
FASB replaced hundreds of pages of
rules-based guidance designed for (GAAP) or IFRS.
specific industries, like construction or
ASC 606 Revenue Recognition 4 A revenue recognition primer

Although the impact on the revenue
recognized will vary across a wide
Timeline
spectrum for different organizations and After a deferred effective date was
industries, for all there will be a need issued by the boards, the ASC 606
for significant changes in the process standard is now effective for:
of how revenue is recognized and a
need for changes and modifications 1. F iscal years beginning after
to internal controls, IT systems, Dec. 15, 2017: for public companies
contracts and other business processes. and certain not-for-profit entities that
Depending on the financial statement have issued conduit debt obligations
impact, there could be effects on
2. F
iscal years beginning after
compensation arrangements, loan
Dec. 15, 2018: for all other entities
agreements, etc. as well.
For issuers that are accelerated filers,
this means the revenue recognized
The five elements of during 2016 may need to be restated as
part of the transition in 2018.
revenue recognition
ASC 606 now provides a structure
through which all revenue transactions
must be assessed as follows:
Definitions
With the issuance of the new revenue
recognition standards, the FASB updated
I dentify the contract
1 with a customer
its glossary with several new definitions.
They include:
I dentify the performance >C

ontract
2 obligations (promises) in An agreement between two or more
the contract parties that creates enforceable rights
and obligations
3 Determine the
transaction price >C
ontract asset
An entity’s right to consideration
Allocate the transaction in exchange for goods or services
4 price to the performance that the entity has transferred
obligations to a customer when that right is
conditioned on something other than
ecognize the revenue
R the passage of time (e.g., the entity’s
5 when (or as) the reporting
organization satisfies the
future performance)
performance obligations

>C
ontract liability >S
tandalone selling price
An entity’s obligation to transfer goods The price at which an entity would sell
or services to a customer for which the a promised good or service separately
entity has received consideration (or to a customer
the amount is due) from the customer
>T
ransaction price
>C
ustomer The amount of consideration to which
A party that has contracted with an an entity expects to be entitled in
entity to obtain goods or services that exchange for transferring promised
are an output of the entity’s ordinary goods or services to a customer,
activities in exchange for consideration excluding amounts collected on behalf
of third parties
>P
erformance obligation
A promise in a contract with a customer
Scope
to transfer to the customer either:
•A
good or service (or a bundle of There are no scope outs for specific
goods or services) that is distinct; or types of entities, which is often the case
with accounting standards. There are,
series of distinct goods or services
•A
however, certain types of transactions
that are substantially the same
which have been scoped out. These are:
and that have the same pattern of
transfer to the customer
Out of scope transactions
>P
robable (second definition)
The future event or events are likely Lease contracts
to occur
Insurance contracts
>R
evenue
Inflows or other enhancements of Financial instruments
assets of an entity or settlements of
its liabilities (or a combination of both) Guarantees
from delivering or producing goods,
rendering services or other activities Nonmonetary exchanges
that constitute the entity’s ongoing between entities in the same
major or central operations line of business to facilitate
sales to customers or potential
customers

IDENTIFYING THE CONTRACT
The first step in applying ASC 606 is 5. I t is probable that the entity will
to identify the contract(s) with the collect the consideration to which
customer. To do so, the entity evaluates it will be entitled in exchange for
indicators of the existence of the the goods or services that will be
contract. Certain conditions must be transferred to the customer. In
present for there to be a contract with a evaluating whether collectibility of an
customer. They are: amount of consideration is probable,
an entity shall consider only the
1. T he parties to the contract have customer’s ability and intention to pay
approved the contract (in writing, that amount of consideration when it
orally or in accordance with other is due. The amount of consideration
customary business practices) and to which the entity will be entitled
are committed to perform their may be less than the price stated in
respective obligations the contract if the consideration is
variable because the entity may offer
2. T he entity can identify each party’s the customer a price concession. 1
rights regarding the goods or services
to be transferred The contract must have commercial
substance and thus create enforceable
3. T he entity can identify the payment rights and obligations. This is a matter
terms for the goods or services to be of law and jurisdictional variations could
transferred occur when applying the guidance. As a
practical matter, however, most entities
4. T he contract has commercial
will be familiar with the terms under
substance (i.e., the risk, timing or
which they conduct business with their
amount of the entity’s future cash
customers and will not have difficulty in
flows is expected to change as a
identifying contracts.
result of the contract)
ASC 606 Revenue Recognition 7 Identifying the contract

...most entities will The Transition Resource Group has
received inquiries related to applying
be familiar with the the collectibility criteria, and the FASB
deliberated these matters and issued
terms under which they an Accounting Standard Update, ASU
2016-12, Revenue from Contracts with
conduct business with Customers (Topic 606), Narrow-Scope
Improvements and Practical Expedients.
their customers and will Among other items addressed were
not have difficulty in some clarifications related to the
collectibility requirement.
identifying contracts.
Briefly, these include the following
amendments to ASC 606:
>T
he objective of this assessment is
to determine whether the contract
There may be situations, however,
is valid and represents a genuine
relating to when the contract takes
transaction on the basis of whether a
effect. If either party has the right
customer has the ability and intention
to terminate a contract without
to pay the promised consideration in
consideration if the contract is wholly
exchange for the goods or services
unperformed, the contract would not
that will be transferred to the
be considered for accounting purposes
customer 2
until the condition changes.
>T
he amendment also adds a new
concept to address situations where if
Collectibility the condition above has not been met,
requirement
when revenue could be recognized.
In such situations revenue could be
One area that may present certain recognized if the entity has transferred
challenges is with respect to item (e), control of goods or services to the
the collectibility requirement. An entity customer and received some payment.
must consider whether, at inception, a If the entity stops the further transfer
customer has the ability and intent to of goods or services and the amount
pay. The standard requires the entity received is not refundable, revenue
to apply the probability concept to this may be recognized to the extent of
decision. Probable in the context of ASC cash received
606, is that future events are likely to
occur. Generally in US GAAP, this has
come to mean that there is a 75 – 80+
percent chance of the event to occur.

Generally speaking, most entities the patient has the intent or the ability
currently go through a process wherein to pay for such services, prior to the
they address the credit risk of customers actual provision of the services in
before granting credit so significant the emergency room. Hospitals will
process changes may not be necessary. need to assess whether and when
But for certain industries, collectibility revenue could be recognized after
is likely to be an issue and the timing of the provision of services and what
recognizing a contract may change. Here amount of revenue would meet the
are a couple of examples: collectibility criteria.
1. A n entity sells a commercial building Currently the AICPA Health Care Expert
for $1,000,000. The customer Panel is evaluating this issue and is
makes a down payment of $50,000 expected to provide some guidance
and the entity extends a loan for through the Financial Reporting
the balance. The customer intends Executive Committee (FinRec).
to open a restaurant and has no
prior experience in the business. Until a contract can be identified meeting
The customer has not pledged any the criteria, any cash collected must
additional collateral for the loan; the be recorded as a contract liability.
intent is to repay the loan from the Entities will need to assess their
profits of the restaurant policies, procedures and the level of risk
associated with meeting contract criteria
I n this situation, the entity may and appropriately update internal control
conclude that there are too many risk over financial reporting.
factors impacting the probability of the
collection of the remaining proceeds
and determine that collectibility is
not probable and as such does not
Combining contracts
recognize a contract ASC 606 requires entities to combine
contracts with the same customer,
The entity would not derecognize the prior to further assessment of the five
building and would record all payments elements, when certain conditions have
made on the loan as a contract liability been met. These are:
until such time as it determines that
collectibility becomes probable. 3 1. T he contracts were negotiated with a
single commercial objective in mind;
2. H ealthcare organizations that provide
emergency services may face an issue
as to collectibility as they may not
have the ability to determine whether

2. T he consideration to be paid for one > S eparate contract:
contract is dependent upon another •T
he scope of the contract increases
contract(s); and because of the addition of promised
goods or services that are distinct
3. G oods and services promised in the
contracts are single performance •T
he price of the contract increases
obligations (as defined in the by an amount of consideration that
standards). reflects the entity’s standalone
selling prices of the additional
Contract modifications
promised goods or services and any
In many industries, contract appropriate adjustments to that price
modifications are a common occurrence. to reflect the circumstances of the
Under current GAAP, generally speaking, particular contract. For example, an
most of the contract modifications are entity may adjust the standalone
accounted for on a prospective basis. selling price of an additional good
ASC 606 may change how modifications or service for a discount that the
are handled in the future. customer receives, because it is not
necessary for the entity to incur the
The standard defines a contract selling-related costs that it would
modification as a change in scope or incur when selling a similar good or
price that is agreed to by both parties. service to a new customer. 5
The change can be written, oral or in
accordance with customary business >M
odification (the changes are not
practices, but it must create enforceable accounted for as a separate contract):
rights. It is possible that both parties
•A
n entity shall account for the
approve a change in scope but have not
contract modification as if it were a
agreed to a change in the consideration.
termination of the existing contract,
In such cases, the entity shall estimate
and the creation of a new contract, if
the consideration in accordance
the remaining goods or services are
with ASC 606 guidance on variable
distinct from the goods or services
consideration 4 and apply the constraint
transferred on or before the date of
to such estimates.
the contract modification. The amount
Contract modifications are accounted of consideration to be allocated to the
for in two ways, either as a separate remaining performance obligations
contract or as a modification to the (or to the remaining distinct goods
original contract, depending on the or services in a single performance
following guidance: obligation identified in accordance
with paragraph 606-10- 25-14(b)) is
the sum of:

– The consideration promised by
...applying this guidance
the customer (including amounts
already received from the may prove to be complex
customer) that was included in the
estimate of the transaction price for businesses that
and that had not been recognized
as revenue and see frequent contract
– T he consideration promised as part modifications.
of the contract modification
•A
n entity shall account for the
contract modification as if it were In practice, applying this guidance may
a part of the existing contract if the prove to be complex for businesses that
remaining goods or services are not see frequent contract modifications.
distinct and, therefore, form part The ASC provides examples which are
of a single performance obligation extracted below:
that is partially satisfied at the date
of the contract modification. The Assumptions
effect that the contract modification An entity agrees to sell 120 items to a
has on the transaction price, and customer for $12,000 ($100 per item),
on the entity’s measure of progress over a six month period. After 60 items
toward complete satisfaction of have been delivered, the contract is
the performance obligation, is modified to deliver an additional 30
recognized as an adjustment to items (150 items in total).
revenue (either as an increase or a
reduction) at the date of the contract Scenario 1: The entity agrees to sell
modification (i.e., the adjustment the additional 30 items at $95 per item,
to revenue is made on a cumulative which is the current standalone selling
catch-up basis). price of the item.
• I f the remaining goods or services In accordance with the guidance, the

are a combination of items (a) and entity determines that the agreement
(b), then the entity shall account for to sell 30 additional items is a separate
the effects of the modification on contract. It therefore delivers the balance
the unsatisfied (including partially of 60 items recognizing revenue at $100
unsatisfied) performance obligations per item, followed by the next 30 items
in the modified contract in a manner recognizing revenue at $95 per item.
that is consistent with the objectives
of this paragraph 6

Scenario 2: The customer negotiates a price of $80 per item for the additional 30 items. It
also notifies the entity that there were minor defects in the 60 delivered already. The entity
agrees to provide a credit of $15 per item or $900 and apply the credit to the delivery of the
remaining, now, 90 items. The entity immediately recognizes the $900 credit as a reduction
to revenue recognized to date.
The new price does not reflect current standalone value and, as such, the entity accounts
for the additional items as a termination of the original contract and entry into a new
contract to deliver 90 items. Revenue will be recognized based on a blended price of
$6,000 for 60 and $2,400 for 30, or $93.33 per unit.
The entries to reflect this modification are as follows:
Contract revenue $900
Contract liability $900
To reflect the credit related to the defective units
Accounts receivable $6,000
Contract revenue $5,600
To record the delivery of the remaining 60 units under the original contract
Contract revenue $2,800
Contract liability $1,300
To reflect the delivery of the final 30 units under the modified terms 7
Other contract modifications could result $200,000 bonus for early completion.
in cumulative catch-up adjustments to At inception the entity cannot conclude
revenue previously recognized, as noted that it is probable that there will not be a
in this example. significant reversal of revenue and does
not include the bonus in its estimate
Assumptions of contract consideration. The entity
A contractor agrees to construct a estimates that the cost to complete
building for $1,000,000 under the the construction will be $700,000, for a
terms of a contract that provides for a gross profit of $300,000 (30 percent).

The revenue will be recognized over time Thus, the entity accounts for the
based on a progress toward completion modification as if it were part of the
calculation. original contract. The entity now updates
its measure of progress to completion,
At the end of the first year, the entity to 51.2 percent (costs to date $420,000 /
has completed 60 percent of the expected costs $820,000). Applying this
construction and, after reassessing to total expected revenue of $1,350,000
the probability of collecting the bonus yields $691,200 of revenue to be
(not yet likely), recognizes $600,000 in recognized. Since it has only recognized
revenue against the costs to date of $600,000 at the end of the previous
$420,000 for a gross profit of $180,000. period, it makes a cumulative catch-
up adjustment of $91,200 as part of
In year two, the customer requests a
recognizing the contract modification. 8
floor plan change resulting in additional
revenue of $150,000 with additional Reviewing these case studies points out
costs of $120,000. The total fixed how complex assessing accounting for
consideration is now $1,150,000 with contract changes is likely to be. Entities
the potential bonus of $200,000. will need to put processes in place, not
In connection with the revision, the only to operationalize the new terms
customer agrees to an additional six of the contract, but to consider the
months on the completion date. As a accounting implications and how future
result, the entity now believes that it will revenue recognition for a particular
earn the bonus of $200,000 and now contract could change. This will require
determines to include the bonus in the additional considerations in the design
contract price. It determines that the of internal controls over financial
additional services are not distinct from reporting related to such modifications.
the other promised services.
1 ASC 606-10-25-12 5 ASC 606-10-25-12

2
Exposure Draft: Revenue from Contracts with 6 ASC 606-10-25-13
Customers (Topic 606), Narrow-Scope
7 Derived from ASC 606-10-55-(111-116)
Improvements and Practical Expedients
8 ASC 606-10-55-(129-133)
3 Derived from ASC 606-10-55-(95-98)
4 Variable consideration will be discussed in
a future article.

IDENTIFYING PERFORMANCE
OBLIGATIONS
Once an entity has determined that it has

a contract with a customer as defined
in ASC 606, the entity must determine ...a contract with a
what the performance obligations are. A
performance obligation is defined in the
customer can be written
ASC Master Glossary as:
or oral as long as it has
A promise in a contract with a customer
commercial substance...
to transfer to the customer either:
a. A
good or service (or a bundle of
goods or services) that is distinct
b. A series of distinct goods or services embodied in the customer invoice, is

that are substantially the same and delivering the television into the hands
that have the same pattern of transfer of Jones in exchange for the stated
to the customer consideration. In another scenario,
garage B agrees to change the oil in
With the reminder that a contract with a Smith’s vehicle in exchange for the stated
customer can be written or oral as long consideration. Here again the customer
as it has commercial substance, here are invoice is the contract. There are
some of the key concepts in identifying countless numbers of such transactions
performance obligations. happening daily. They are straightforward
and ASC 606 is generally easily applied.
In many revenue transactions, the However, there are many more contracts
promise is explicitly stated as either a which contain multiple performance
good or a service. For example, retailer obligations. For these, careful analysis
A agrees to sell customer Jones a new and judgment are required.
television. The performance obligation,
ASC 606 Revenue Recognition 14 Identifying performance obligations

Generally, performance obligations are Recently the FASB issued Accounting
clearly stated in the contract. However, Standards Update (ASU) 2016-10,
performance obligations can also be Identifying Performance Obligations and
implicit in the contract if (based on Licensing, to provide some clarification as
the entity’s stated policies, business to how an entity evaluates performance
practices or specific statements), when obligations. The entity does not need to
entering into the contract, the promises consider promises that are immaterial in
create a valid expectation on the part of the context of the contract. Additionally,
the customer. if elected as an accounting policy,
shipping and handling activities after the
For instance, in the above examples, if customer has obtained control of the
the retailer agrees at the time of the sale good may be considered to be an activity
to deliver the television to the customer, to fulfill the promise of the good rather
this may create a separate performance than a separate performance obligation.
obligation. If the garage always washes Therefore, in the examples above, we
the customer’s car after changing the believe both the retailer and the garage
oil, this may be a separate performance could make an accounting election to
obligation. Although these are inherently treat the additional services as part of
simple, other performance obligations the fulfillment of the promised good
require more judgment to identify — (television) and service (oil change).
especially when applying the guidance to
complex contracts.
Note that performance obligations do Distinct goods

not include administrative tasks that an
entity may need to undertake to fulfill the
or services
contract, as these do not transfer a good Examples (not intended to be limiting) of
or service to a customer. promised goods or services are provided
in ASC 606 as follows:
1. Sale of goods produced by an entity

(e.g., inventory of a manufacturer)
...performance
2. Resale of goods purchased by
obligations do not
an entity (e.g., merchandise of
include administrative a retailer)
tasks that an entity 3. R esale of rights to goods or

services purchased by an entity
may need to undertake (e.g., a ticket resold by an entity
acting as a principal, as described
to fulfill the contract... in paragraphs 606-10-55-36
through 55-40)

4. Performing a contractually agreed- a. T he customer can benefit from the
upon task (or tasks) for a customer good or service either on its own or
together with other resources that are
5. Providing a service of standing ready readily available to the customer (i.e.,
to provide goods or services (e.g., the good or service is capable of being
unspecified updates to software that distinct)
are provided on a when-and-if-
available basis) or of making goods b. T he entity’s promise to transfer the
or services available for a customer good or service to the customer is
to use as and when the customer separately identifiable from other
decides promises in the contract (i.e., the good
or service is distinct within the context
6. P roviding a service of arranging for of the contract) 2
another party to transfer goods or
services to a customer (e.g., acting The customer must obtain an economic
as an agent of another party, as benefit from the use of the good or
described in paragraphs 606-10-55- service. This can be through use,
36 through 55-40) consumption and resale or through other
indicators that economic value was
7. Granting rights to goods or services obtained. In some cases, the customer
to be provided in the future that a may have to add other resources to
customer can resell or provide to its obtain the economic value. This is
customer (e.g., an entity selling acceptable as long as such resources are
a product to a retailer promises to readily available. This is demonstrated
transfer an additional good or service by the customer already having obtained
to an individual who purchases the such a resource from the entity or
product from the retailer) through other available sources; or if the
resource is separately sold by the entity
8. Constructing, manufacturing or
or others. Indicators that an entity can
developing an asset on behalf of
benefit from a good or service include the
a customer
fact that an entity regularly sells such a
good or service.
9. G ranting licenses (see paragraphs
606-10-55-54 through 55-65)
Factors that indicate a promise is
separately identifiable, as noted in (b), are:
10. G ranting options to purchase
additional goods or services (when
1. T he entity does not provide a
those options provide a customer
significant service of integrating the
with a material right, as described
good or service with other goods or
in paragraphs 606-10-55-41 through
services promised in the contract into
55-45) 1
a bundle of goods or services that
represent the combined output for
The key factor in assessing the promises
is whether they are distinct. A promise is
distinct if both of these conditions are met:

which the customer has contracted. In Goods and services are not distinct
other words, the entity is not using the A contractor enters into an agreement
good or service as an input to produce with a hospital to build a new wing.
or deliver the combined output The contract states that the contractor
specified by the customer. is responsible for overall project
management, and states various goods
2. T he good or service does not
and services to be provided, including
significantly modify or customize
engineering, site work, construction of the
another good or service promised in
building, all HVAC and finishing services.
the contract
All of the promised goods and services
3. T he good or service is not highly
are capable of being distinct as they
dependent on, or highly interrelated
could be provided by other entities so
with, other goods or services
the customer could benefit from them
promised in the contract. For example,
by adding resources. However, the
the fact that a customer could decide
goods and services are not distinct
not to purchase the good or service
in the context of the contract as the
without significantly affecting the
entity provides significant services in
other promised goods or services
integrating all of the promises to deliver
in the contract might indicate that
a finished building, for which the hospital
the good or service is not highly
has contracted. Because both of the
dependent on, or highly interrelated
above criteria were not met, the contract
with, those other promised goods or
contains one performance obligation. 4
services. 3
If the promises do not meet the Distinct goods and services

requirements for separating, the
A software company enters into a
performance obligations shall be
contract to deliver the following to a
combined into one performance
customer: A software license, installation
obligation. A contract could have several
services, software updates and online
performance obligations which in
technical support for a period of two
themselves include sets of promises that
years. Analyzing the promises beside the
are not distinct and cannot be separated.
software license:
In practice, we believe that making the
The installation services are routinely
determination as to whether the promise
provided by other entities and do not
is separately identifiable may present
significantly modify the software.
some challenges. Some examples of
Therefore, the customer can benefit from
applying the guidance, derived from the
the service on its own by adding other
ASC 606 examples, follow:
readily obtained resources (i.e.,
the software license).

The software license is delivered Revenue will be recognized as each is
separately and can function without fulfilled by the entity. Specifically, in
the updates or the technical support. this example the consideration related
Therefore, the customer can benefit from to the software license itself could not
the license on its own. be recognized until the customization
services were completed. 6
The updates and technical support are
also separately available as the entity
Assessing explicit
sells the products separately.
The entity thus determines the contract

has four performance obligations:
and implicit promises
in a contract
1. S oftware license
As noted above, the contract can contain
2. I nstallation services additional performance obligations that
3. S oftware updates are implied by the entity’s business
4. Technical support practices. The following examples
provide guidance on how to analyze
Revenue will be recognized as each such situations. The basic facts relate to
obligation is fulfilled by the entity. 5 a manufacturer that sells a product to a
distributor who in turn sells the products
to an end user.
Customization services
Assume the same facts in the software
example, except that as part of the Explicit promise of service
installation services, the software is to The contract states the manufacturer
be significantly customized to meet the will provide free maintenance service
customer’s special needs. In this situation, without additional consideration (free).
since the customer could not obtain the (This is similar to many new cars now
special custom installation services from sold with free periodic maintenance for
another vendor and therefore could not a period of years.) The maintenance
obtain the benefit of the software license services will be outsourced to the
from readily obtained resources, the distributor. The entity determines
software license and custom installation that this arrangement constitutes a
are combined into one performance separate promise, as the maintenance
obligation. Thus, the contract has three could be provided by the distributor or
performance obligations: a third party, and therefore is distinct.
As such, the consideration for the
1. S oftware license and custom product is allocated to two performance
installation obligations. 7
2. S oftware updates
3. Technical support

Implicit promise of service warranty that the product or service
The entity has historically provided free will function as intended. This can be
maintenance for its products. There is driven by standard business practices
nothing specific in the contract (either or sometimes specific laws. In other
with the distributor or the end user), cases, customers can also purchase
but the entity determines that the end an additional warranty for separate
user has a valid expectation of free consideration, which extends the normal
maintenance based on the entity’s warranty service period or perhaps
customary business practice. In this provides additional services.
case, once again, the entity determines
If the customer has an option to
there are two performance obligations. 8
purchase a warranty separately, then this
Services that are not a is a distinct performance obligation and
performance obligation should be accounted for in accordance
with the relevant guidance. That is,
In this situation, the contract with
the total consideration associated
the distributor does not contain an
with the product and warranty should
explicit promise of free maintenance,
be allocated based on relative sales
nor does the entity’s customary
value and the revenue allocated to the
business practices indicate that free
warranty obligation should be recognized
maintenance would be expected
over the warranty period, generally using
by the end user. However, after the
the straight line method.
products have been delivered to the
distributor and before the sale to the If the customer does not have the option
end user, the manufacturer unilaterally to purchase a warranty separately, then
decides to provide free maintenance this is not a separate performance
and notifies the distributor of its obligation. The entity should account
intent. In this situation, since the for these warranties in accordance
free maintenance was not part of with current product warranty guidance
the contract or negotiated for by any provided in ASC 460-10.
parties, it is not considered a separate
performance obligation. In this situation, The guidance in ASC 606 provides several
the manufacturer would apply the indicators as to whether or not the
guidance in ASC 450 with respect to warranty should be considered a separate
contingencies. 9 performance obligation as follows:
a. W
hether the warranty is required
Warranties by law: If the entity is required by law

to provide a warranty, the existence of
ASC 606 provides specific guidance with that law indicates that the promised
respect to warranties. Many products warranty is not a performance
are sold with an explicit or implied obligation because such requirements

typically exist to protect customers
from the risk of purchasing defective
Complying with the
products
requirements for
b. T
he length of the warranty coverage
identifying separate
period: The longer the coverage
period, the more likely it is that the performance obligations is
promised warranty is a performance
obligation because it is more likely likely to require changes
to provide a service in addition to the
assurance that the product complies in business process and
with agreed-upon specifications
internal control over
c. T
he nature of the tasks that the
entity promises to perform: If it is financial reporting.
necessary for an entity to perform
specified tasks to provide the
assurance that a product complies
with agreed-upon specifications multiple promises in contracts, the
(e.g., a return shipping service for process may be more difficult. The
a defective product), then those identification of separate performance
tasks likely do not give rise to a obligations is critical, as ultimately it will
performance obligation 10 determine the timing of when revenue
may be recognized and how much. It
Entities that currently provide such is reasonably possible that the need to
warranties will likely experience a change identify these separate performance
in how these are being accounted for obligations will change the historical
under current GAAP. The amount and patterns of revenue recognition. Entities
timing of revenue may differ. should analyze standard business
practices and assess the impacts this
For many entities, analyzing contracts requirement may have. Complying with
for separate performance obligations the requirements for identifying separate
may be relatively straightforward and performance obligations is likely to
not involve additional judgments, but require changes in business process and
for other entities with implied or explicit internal control over financial reporting.
1 ASC 606-10-25-18 6 Derived from ASC 606-10-55-(146-150)

4 Derived from ASC 606-10-55-(137-140) 9 Derived from ASC 606-10-55-(156-157)
5 Derived from ASC 606-10-55-(141-145) 1 0 ASC 606-10-55-33

DETERMINING THE
TRANSACTION PRICE
According to the ASC 606 glossary, to return the shoes for a full refund. Below
transaction price is defined as: we discuss the complexities related to
determining the transaction price.
The amount of consideration to which
an entity expects to be entitled in
Variable
exchange for transferring promised
goods or services to a customer,
excluding amounts collected on behalf
of third parties.
consideration
Many contracts have a degree of
Of course in many revenue contracts, variability in the specified transaction
such as in retail transactions, determining price. This variability can arise because
the transaction price is a straightforward of discounts, rebates, refunds, credits,
exercise. A customer enters a store to buy etc. which are either explicitly stated in
a pair of shoes with a listed price of $150. the contract or implied by the entity’s
The customer pays the listed price and in customary business practices. If this
exchange receives the shoes. Revenue of element of variability exists in the
$150 is recognized. contract, the entity must estimate the
consideration it expects to receive
However, in many other revenue contracts, and use that amount as the basis for
determining the transaction price is recognizing revenue as the goods or
complex because of the element of services are transferred to the customer.
variable consideration, inherent in the
contract. In fact, even the simple shoe The standard specifies two methods for
purchase described above may be determining the variable consideration.
complicated if the customer has the right These are the expected value method
and the most likely amount method.
ASC 606 Revenue Recognition 21 Determining the transaction price

The standard provides the following
descriptions: ...these methods are
a. T
he expected value—The expected not accounting policy
value is the sum of probability-
weighted amounts in a range of choices, but are to be
possible consideration amounts. An
expected value may be an appropriate the best method for
estimate of the amount of variable
consideration if an entity has a large recognizing revenues,
number of contracts with similar
characteristics.
depending on the facts
b. T
he most likely amount—The most
and circumstances in
likely amount is the single most
the contract.
likely amount in a range of possible
consideration amounts (i.e., the single
most likely outcome of the contract).
The most likely amount may be an Note that these methods are not
appropriate estimate of the amount of accounting policy choices, but are to be
variable consideration if the contract the best method for recognizing revenues,
has only two possible outcomes depending on the facts and circumstances
(e.g., an entity either achieves a in the contract. The following examples
performance bonus or does not). 1 illustrate the concepts:
Expected value method

An entity enters into a contract to sell widgets to a customer, over a two year period of time,
up to a maximum of 1,000. The contract specifies that if the customer takes 100, the price
will be $10 per item; for purchases from 101 – 500 items, the price will be $9 per item; any
purchases in excess of 500 items will be at $8 per item. Based on the entity's expectations
with this particular customer, it would estimate, using a probability weighted approach, how
many items it expects to sell to the customer. The entity determines the following:
Units sold Price Probability Weighted average units
100 10 15% 15
490 9 75% 368
610 8 10% 61
Total 444

Based on this expected value (subject to the constraint discussed below) the entity expects
to sell 444 items. In that event they would earn $1000 (100*$10) + $3,096 (344*$9) = $4,096
in revenue at an average revenue of $9.23 per unit. The entity would record revenue for the
first 100 units as follows:
DR CR
Revenue $923
Then for the next 344 units:
DR CR
Revenue $3,173
An entity must revisit the estimate of variable consideration at each reporting period to
determine whether the estimate is still valid based on the current facts and circumstances.
That is, does the entity still believe it will sell 444 units?
If the estimate changes, the entity must account for the change in accordance with ASC
606-10-32-(42-45). For example, assume the entity has been delivering units to the customer
and the demand for the units is expected to exceed the original estimate of 444 and now
is estimated to be 600 units. As a result, the estimated per-unit price through the run of the
contract would now be $1,000 + $3,600 (400*9) + $800 (100*8) = $5,400, for an average
sales price of $9.00 ($5,400/600).

Assume that through the date of the change, the entity has sold 350 units and in the period
of the change the entity sells an additional 200 units. The entries would be as follows:
DR CR
Period(s) prior to the change (sales of 350 units):
Revenue $923
To record sales of the first 100 units.
Revenue $2,308
To record the sales of the second 250 units.
Period of change (sales of 200 units):
Accounts receivable $400
Revenue $1,800
Revenue $81
To record sales of 100 units at $9 and 50 units at $8; to recognize revenue on 200
at $9 and to reduce the revenue on the previously recognized revenue on the first
350 units by $81 (the difference between 9.23-9.00=.23).

After this transaction, the remaining While ASC 606
balance in the contract liability account
would be $53, which would be cleared requires entities
through the final expected sale of 50 units
as follows: to estimate how
much revenue will
DR CR
Accounts receivable $400 be recognized in

Revenue $450 connection with a
Contract liability $50 contract, the standard
(Difference due to rounding)
also requires entities
This method of recognizing revenue
contrasts with current GAAP, which
to consider constraints
would not recognize any variability but
on such revenue.
rather would recognize revenue based on
the invoiced amount at the associated
discount level. Clearly the accounting
complexities are increasing. it would recognize the base price and
reconsider its estimate at each reporting
period.2
Most likely Generally speaking, the concept of
amount method variable consideration is only relevant
The most likely amount method would for those contracts where the revenue
be more likely to be used in situations will be recognized over time rather than
where there is a binary decision about at a point in time.
how much revenue to recognize: as in
situations where an entity contracts to
deliver a product or service for a fixed Constraining
price on a particular date, but has the
opportunity to earn a bonus if it can estimates of variable
deliver the product within a specified
time period. In this scenario, the entity
consideration
considers whether or not it can earn the While ASC 606 requires entities to
bonus. If it believes it is probable (subject estimate how much revenue will be
to the constraint discussed below), it recognized in connection with a contract,
would recognize the higher amount of the standard also requires entities to
revenue over the contract period. If not, consider constraints on such revenue.

Entities may only recognize revenue to Note that the standard permits an
the extent that it is not probable that entity to recognize some of the variable
there will be significant reversal of such consideration when applying the
revenue. Entities shall consider not only constraint. When the expected value is
the likelihood of a reversal, but also used, an entity may determine that all
the potential magnitude. Here, again, of the expected consideration is subject
probable is defined as it is in other GAAP, to the constraint; it may also determine
which is a probability in excess of 75 – that some of the expected consideration
80+ percent. should be used as the basis for
recognizing the revenue over the contract
The standard provides indicators period. That entity continues to evaluate
of when a revenue reversal may be the probability of significant reversal
probable, as follows: as part of its reassessment of variable
consideration at each reporting period.
a. The amount of consideration is
highly susceptible to factors outside
the entity’s influence. Those factors
may include volatility in a market, the Significant financing
judgment or actions of third parties,
weather conditions and a high risk of
component
ASC 606 also brings the concept of
obsolescence of the promised good
a financing component into revenue
or service.
recognition. For contracts where the
b. T he uncertainty about the amount of entity expects to deliver the goods or
consideration is not expected to be services in a time period of less than
resolved for a long period of time one year, entities may elect a practical
expedient to disregard the consideration
c. T he entity’s experience (or other of the time value of money. For all
evidence) with similar types of other longer term contracts, an entity
contracts is limited, or that experience must consider whether the contract
(or other evidence) has limited has a financing component and, if
predictive value so, recognize interest income (when
customer payments are deferred)
d. T he entity has a practice of either or interest expense (when customer
offering a broad range of price payments are accelerated).
concessions or changing the payment
terms and conditions of similar
contracts in similar circumstances
e. T he contract has a large number and

broad range of possible consideration
amounts 3

The standard provides the following c. T
he difference between the promised
indicators of a financing component: consideration and the cash selling
price of the good or service (as
a. T
he difference, if any, between the described in paragraph 606-10-32-
amount of promised consideration 16) arises for reasons other than
and the cash selling price of the the provision of finance to either
promised goods or services the customer or the entity, and the
difference between those amounts
b. T
he combined effect of both of the is proportional to the reason for
following: the difference (e.g., the payment
terms might provide the entity or
–T
he expected length of time between
the customer with protection from
when the entity transfers the
the other party failing to adequately
promised goods or services to the
complete some or all of its obligations
customer and when the customer
under the contract)
pays for those goods or services
The following examples, derived from
he prevailing interest rates in the
–T
the standard, illustrate the concept.
relevant market4
An entity sells a product to a customer
The standard provides for certain
for $121,000 that is payable 24 months
situations which would not indicate a
from the delivery date. The customer
financing component, as follows:
obtains control of the product upon
a. T
he customer paid for the goods or delivery. The cash selling price for
services in advance, and the timing the product is $100,000. As such, the
of the transfer of those goods or entity determines there is a significant
services is at the discretion of the financing component. The entity
customer determines there is an implicit discount
rate of 10 percent in the contract. Here
b. A
substantial amount of the the entity must determine if the implicit
consideration promised by the interest rate is comparable to the rate in
customer is variable, and the amount a separate financing arrangement and
or timing of that consideration varies concludes that it is.
on the basis of the occurrence or
nonoccurrence of a future event that is
not substantially within the control of
the customer or the entity (e.g., if the
consideration is a sales-based royalty)

Upon delivery, the entity would record Over the two year period of the contract,
the following: the entity recognized interest expense:
DR CR DR CR
Accounts Interest
$100,000 $4,940
receivable expense
Revenue $100,000 Contract

$4,940
liability
Thereafter, the entity would periodically
accrete the interest income to end with Upon delivery of the product, the entity
a receivable balance of $121,000, when recognizes revenue:
the payment is due.
DR CR
To illustrate the accounting for advance
payments, consider this example. Contract
$44,940
liability
An entity enters into a contact to deliver Revenue $44,940
a machine, for $50,000, in two years
when control of the asset will pass
An entity will determine the discount
to the customer. The entity offers the
rate at inception based on then
following: Payment of $50,000 when
prevailing rates for separate financing
the machine is delivered or payment of
transactions. Once determined, the
$40,000 upon signing of the contract.
entity does not adjust the rate for
Here the implied interest rate in the
changes in interest rates.
contract is 11.8 percent. However, the
entity knows that its implicit borrowing
rate is actually 6 percent. That rate will
be used to calculate interest expense. Refund liabilities
Goods are often sold with an explicit
The entity records the following upon
or implied right of return. In those
signing of the contract:
situations, an entity must determine
whether goods will be returned and
DR CR reduce revenue accordingly. With sales of
Cash $40,000 many similar products, it may be useful
to use a portfolio approach 5.
Contract
$40,000
liability

As noted in this example: the FASB clarified that the fair value
An entity sells consumer products and of non-cash consideration should be
has a reliable history of the returns it measured at contract inception; and that
can expect from those sales. During variable consideration does not include
its seasonal busy time, the entity sells any variability related to the fair value of
10,000 units at a price of $100 and a cost non-cash consideration.
of $80. The units may be returned within
30 days for a full refund. The returned
units can be resold. Based on experience,
the entity expects that 5 percent of the
Consideration
units will be returned for a refund. payable to a customer
Consideration expected to be paid to
The entity uses the portfolio approach the customer reduces the transaction
and records the following entries: price. This can be in the form of cash,
credits or other items, such as coupons
DR CR or vouchers for future purchases. In
situations where the entity is uncertain
Revenue $50,000
as to whether the customer will make
Refund use of such consideration, the entity
$50,000
liability must estimate an amount and record
a liability based on the estimate. The
Returned
$40,000 estimate will need to be reassessed at
inventory
each reporting period.
Cost of
$40,000
goods sold
The returned inventory amount should be

reduced if the entity is expected to incur Applying the concepts
any additional handling costs.
will result in many
more judgments by
Non-cash management and,
consideration
Some contracts may contain provisions
as such, will require
for non-cash consideration to be paid
robust internal
by the customer, including equity
consideration. In these cases, the entity controls over
shall estimate the consideration at its
fair value. Recently the FASB issued ASU financial reporting...
2016-12, which provided narrow scope
improvements to ASC 606. In that ASU,

If the consideration payable to the depending on the nature of an entity’s
customer is in exchange for distinct business and revenue streams. These
goods or services where the entity assessments historically have not
obtains control upon transfer, then the been required under current revenue
entity will account for such consideration recognition models. In particular, the
in the manner which it accounts concept of variable consideration could
for purchases from other suppliers. result in accelerating revenue. Applying
However, if the consideration paid is in the concepts will result in many more
excess of the fair value of the distinct judgments by management and, as
goods or services, the entity will account such, will require robust internal controls
for that difference as a reduction of the over financial reporting to provide a
transaction price. consistent and reliable process when
applying the judgments.
Determining the transaction price
of a contract can be quite complex,
1 ASC 606-10-32-8 4 ASC 606-10-32-16

2 See previous section for an example related to
5 See previous section for an example related to
performance obligations which also includes this performance obligations which also includes this
type of variable consideration. type of variable consideration.
3 ASC 606-10-32-12

ALLOCATING THE TRANSACTION
PRICE TO SEPARATE
PERFORMANCE OBLIGATIONS
The objective of ASC 606 in allocating

the transaction price is that the
entity will recognize revenue for each Standalone selling price
performance obligation in the amount
the entity expects to receive in exchange
is the price at which
for the promised goods or services. To
an entity would sell a
do so, the entity should allocate the
transaction price to the promises based promised good or service
on the relative standalone selling price of
the separate goods or services. This is separately to a customer.
defined in the glossary as follows:
The price at which an entity would sell

a promised good or service separately
to a customer. when estimating the selling price.
The standard describes three suitable
methods for determining the standalone
selling price, but does not require
Basic allocation their use if a more suitable method is
An entity will determine the standalone available with more observable inputs.
selling price for each of the performance
obligations at the inception of the The suggested methods are:
contract and will not adjust the initial >A
djusted market assessment
allocation for future changes in any approach—An entity could evaluate
selling prices. The entity should the market in which it sells goods
maximize the use of observable inputs or services and estimate the price
ASC 606 Revenue Recognition 31 Allocating the transaction price

that a customer in that market would 2. T he entity has not yet established
be willing to pay for those goods or a price for that good or service,
services. That approach also might and the good or service has
include referring to prices from the not previously been sold on a
entity’s competitors for similar goods standalone basis (i.e., the selling
or services and adjusting those prices price is uncertain) 1
as necessary to reflect the entity’s
costs and margins Depending upon the nature of the
performance obligations, an entity may
>E
xpected cost plus a margin need to use a combination of methods
approach—An entity could forecast if certain performance obligations have
its expected costs of satisfying a highly variable or uncertain standalone
performance obligation and then add selling prices.
an appropriate margin for that good
or service Once the selling prices have been
determined, the entity will apply the
>R
esidual approach—An entity may relative values to the total contract
estimate the standalone selling price consideration and estimate the amount
by reference to the total transaction of the transaction price to be recognized
price less the sum of the observable as each promise is fulfilled.
standalone selling prices of other
goods or services promised in the Example: Allocating consideration
contract. However, an entity may use
a residual approach to estimate, in An entity agrees to sell three products
accordance with paragraph 606-10- (A, B and C) to a customer for $100. The
32-33, the standalone selling price of entity regularly sells product A, so a directly
a good or service only if one of the observable price is available. However,
following criteria is met: for products B and C, the entity does not
have directly observable selling prices
1. T he entity sells the same good and, therefore, must estimate them. For
or service to different customers product B, the entity uses the adjusted
(at or near the same time) for a market assessment approach as they are
broad range of amounts (i.e., the aware of other entities that sell a similar
selling price is highly variable product. For product C, the entity was
because a representative standalone unable to observe any similar products and
selling price is not discernible thus uses an estimated cost plus margin
from past transactions or other approach to estimate the selling price.
observable evidence)

The analysis yielded the following:
Product A $50 Directly observable selling price
Product B $25 Adjusted market assessment approach
Product C $75 Cost plus margin approach
Total $150
The entity initially allocates the consideration as follows:
Relative percentage Allocated consideration
Product A 50/150 = 33.33% $33.33
Product B 25/150 = 16.67% $16.67
Product C 75/150 = 50.0% $50.00
Total $100
In the example, the customer received >T

he entity also regularly sells on
a discount of $50 from the standalone a standalone basis a bundle (or
selling prices for purchasing the bundles) of some of those distinct
bundle. This discount was allocated goods or services at a discount to the
proportionately.2 standalone selling prices of the goods
or services in each bundle
Allocating a discount >T

he discount attributable to each
bundle of goods or services described
Typically, an entity will allocate a in (b) is substantially the same as the
discount based on relative selling prices discount in the contract, and an analysis
as noted in the above example, but the of the goods or services in each bundle
standard does provide guidance for provides observable evidence of the
allocating discounts to some, but not performance obligation (or performance
all performance obligations if certain obligations) to which the entire discount
conditions are met, as follows: in the contract belongs3
>T
he entity regularly sells each distinct If an entity determines that it should allocate
good or service (or each bundle of a discount to one or more, but not all of
distinct goods or services) in the the performance obligations, it must do so
contract on a standalone basis before applying the residual approach.

Example: Allocating a discount
to fewer than all performance
The residual approach
Using the residual approach is not a free
obligations
choice, as it can only be used when the
An entity enters into a contract to sell three conditions noted before are present. The
products for $100. The standalone selling following example illustrates when use
prices are as follows: of the residual approach is appropriate.
An entity enters into a contract to sell

Product A $40
products A, B and C as in the above
Product B $55 example, but also agrees to supply
product D. The total consideration is $130.
Product C $45 The standalone selling price is sold to
several customers, but at a wide range of
Total $140
prices, $15 - $45. The entity determines
that, because of this variability, it meets
The contract therefore has a discount of one of the conditions in the standard for
$40, but the entity sells products B and C using the residual approach.
together for $60 and product A for $40.
In this situation, the discount of $40 would Before applying the residual approach,
be applied to products B and C, but not it must apply any discounts to other
product A. The relative standalone selling performance obligations as required in
prices would be used to allocate the the standard. Because of the observable
consideration: evidence for products A, B and C, it
determines that $100 of the selling price
should be allocated to those items.
Product B 55 / 100 = 55% $33 This leaves $30 of the consideration to
allocate to product D, which is in the
Product C 45 / 100 = 45% $27
range of selling prices that the entity has
Total $60 4 used for product D alone.
Depending on the complexity of the Product A $40 Directly

contract and the number and types of observable
performance obligations, an entity may
need to go through several steps to Product $60 Directly
B and C observable
completely allocate the consideration.
w/ discount
However, as noted above, typically any
discounts will be allocated based on the Product C $30 Residual
relative standalone selling prices. approach
Total $130 5

Note in the example, if the selling price b. A
llocating the variable amount
were $105, this would result in an of consideration entirely to the
allocation of only $5 to product D, which performance obligation or the distinct
is not a price within the observable range good or service is consistent with the
of the entity’s sales. Therefore, the entity allocation objective in paragraph 606-
would need to use another method to 10-32-28 when considering all of the
determine the standalone selling price performance obligations and payment
for product D and properly allocate the terms in the contract7
consideration.
Any remaining transaction price will
be allocated to other performance
obligations in accordance with the
Allocation of variable methods noted above.
consideration Example of a special allocation
If a contract calls for variable
consideration, the entity shall An entity sells a customer two licenses:
allocate the variable consideration it X and Y. The entity determines that
has determined can be recognized, these are distinct performance
subject to the constraint. 6 This can obligations. The standalone selling
result in situations where the variable prices are $800 for X and $1,000 for Y.
consideration can be allocated to all of The contract provides a fixed price of
the performance obligations based on $800 for X and for Y the selling price is
relative standalone selling prices, or if a royalty of three percent of future sales
the variable consideration only relates related to the use of license Y. The entity
to a specific performance obligation, estimates that the variable consideration
such as a bonus for completing one associated with license Y will be $1,000.
or more promises before a certain
The entity considers the requirements
date, it is allocated only to the relevant
above. The variable payment is related
performance obligation.
solely to Y, so criterion (a) has been met.
These allocations to specific It assesses criterion (b) and determines
performance obligations must meet both that this has been met, because the
of the following criteria: expected royalty payment approximates
the standalone selling prices of X and Y.
a. T
he terms of a variable payment relate Therefore, none of the fixed consideration
specifically to the entity’s efforts to will be allocated to license Y.8
satisfy the performance obligation or
transfer the distinct good or service
(or to a specific outcome from
satisfying the performance obligation or
transferring the distinct good or service)
AND

The entity recognizes $800 of revenue the variable consideration to license Y.
when license X is transferred to the This is because the amount allocated
customer. It recognizes no revenue to licenses X and Y would not reflect a
when license Y is delivered, rather as the reasonable allocation based upon their
customer generates sales, it recognizes standalone selling prices. Consequently,
revenue at the three percent royalty rate. the entity first allocates the $300
amount to licenses X and Y based on
In a variation of the preceding example, standalone selling prices, then allocates
assume the standalone selling prices its estimate of variable consideration of
of licenses X and Y are the same, but $1,500 on the same basis. However, this
that the contract states a fixed amount revenue cannot be recognized until the
of $300 for license X and a five percent sales actually occur or the performance
royalty for license Y, which the entity obligation is satisfied.
estimates will be $1,500. In this case,
even though the variable component License Y is transferred immediately and
is attributable entirely to license Y, it license X is transferred three months later.
would be inappropriate to allocate all of The entity recognizes revenue as follows:
At delivery of license Y Bases upon fixed price of $300
Product Allocation Revenue recognized
License Y 1000 / 1800 = 55.6% $167
Three months later
License X 800 / 1800 = 44.4% $133
Assume that in the month after delivery of license Y, but before delivery of license X, the
sales royalty is $200. The entity would then record the following revenue entry:
DR CR
Accounts receivable $200
Revenue license Y $111
Contract liability related to X $89

In the same ratio as above, the entity Contract modifications
recognizes 55.6 percent of the revenue
If the change in transaction price is the
as related to license Y. It also records
result of a contract modification, 10 an
a contract liability for the balance of
entity will apply the following guidance
44.4 percent, as license X has not been
in whichever of the following ways is
delivered yet. It will continue to record
applicable:
the contract liability until delivery of
license X. Thereafter, it will recognize >A
n entity shall allocate the change
revenue in the same ratios for both in the transaction price to the
licenses as the royalties are earned. 9 performance obligations identified in
the contract before the modification
if, and to the extent that, the change
Changes in in the transaction price is attributable
to an amount of variable consideration
transaction prices promised before the modification and
the modification is accounted for in
Resolution of uncertainties accordance with paragraph 606-10-
If the transaction price changes because 25-13(a)
an uncertainty has been resolved, such
as one related to variable consideration, > I n all other cases in which the
the entity will allocate those changes to modification was not accounted for
the performance obligations based on as a separate contract in accordance
the original allocation without regard to with paragraph 606-10-25-12, an
any changes in standalone selling prices entity shall allocate the change in the
which may have occurred. The entity transaction price to the performance
will also allocate the change entirely to obligations in the modified contract
one or more performance obligations (i.e., the performance obligations that
following the guidance noted above for were unsatisfied or partially unsatisfied
doing so at contract inception. immediately after the modification)11
...when variations in transaction price, including

discounts or variable consideration, are related to other
than all of the performance obligations the complexities
increase as do the number of judgments.

Allocating the transaction price can be When applying this element in complex
a relatively straightforward exercise environments, attention to adequate
when standalone selling prices are easily documentation of the related processes
obtained. However, when variations in for evaluating the elements, making
transaction price, including discounts and documenting the related judgments
or variable consideration, are related and estimates, and adequately applying
to other than all of the performance internal control over financial reporting
obligations the complexities increase as will be challenging.
do the number of judgments.
1 ASC 606-10-32-34 7 ASC 606-10-32-40

2 Derived from ASC 606-10-55-(256-258) 8 Derived from ASC 606-10-55-(271-274)
4 ASC 606-10-55-(261-264) 1 0 Discussed in a previous section on
5 ASC 606-10-55-(265-268) identifying a contract
6 A s discussed in the previous section, recognition 1 1 ASC 606-10-32-45

of variable consideration is limited to the
amount that is probable not to result in a
significant revenue reversal

RECOGNIZING REVENUE
AS EACH PERFORMANCE
OBLIGATION IS SATISFIED
The final element in ASC 606 is

recognizing revenue as the entity
satisfies the performance obligations, A key concept in the
stated as:
determination of
An entity shall recognize revenue when
(or as) the entity satisfies a performance
“transfer” is that the
obligation by transferring a promised customer obtains control
good or service (i.e., an asset) to a
customer. An asset is transferred when of the asset...
(or as) the customer obtains control of
that asset.1
A key concept in the determination of

“transfer” is that the customer obtains not the only, of control passing to the
control of the asset, and of course, the customer include:
entity itself must make a determination
>U
sing the asset to produce goods
as to when it believes its customer
or provide services (including public
obtains control. Control of an asset is
services)
demonstrated when an entity has the
ability to direct and realize all of the >U
sing the asset to enhance the value
remaining benefits associated with of other assets
the use of the asset. This concept also
>U
sing the asset to settle liabilities or
covers the benefit of services provided
reduce expenses
to an entity, even though the benefit may
be only momentary. Some indicators, but > S elling or exchanging the asset
ASC 606 Revenue Recognition 39 Recognizing revenue

> P ledging the asset to secure a loan
...an entity transfers
> H olding the asset
an asset or service to
Control passes to a customer in one of
two ways: either at a point in time or over a customer, thereby
time. Both concepts are discussed below.
completing the
performance obligation.
Performance However, determining
obligations satisfied
whether control has
at a point in time
This concept is the most basic and passed to the customer
applies to many revenue transactions in
retail, wholesale, manufacturing, food is not always simple.
and beverage, real estate and other
industries. Basically, an entity transfers
an asset or service to a customer,
thereby completing the performance the access of other entities to those
obligation. However, determining benefits. Therefore, the transfer of legal
whether control has passed to the title of an asset may indicate that the
customer is not always simple. ASC customer has obtained control of the
606 includes several indicators of the asset. If an entity retains legal title solely
transfer of control, which include, but as protection against the customer’s
are not limited to, the following: failure to pay, those rights of the entity
would not preclude the customer from
>T
he entity has a present right to obtaining control of an asset.
payment for the asset—If a customer
>T
he entity has transferred physical
presently is obliged to pay for an
possession of the asset—The
asset, then that may indicate that
customer’s physical possession of an
the customer has obtained the
asset may indicate that the customer
ability to direct the use of, and obtain
has the ability to direct the use of,
substantially all of the remaining
and obtain substantially all of the
benefits from, the asset in exchange
remaining benefits from, the asset or
>T
he customer has legal title to to restrict the access of other entities
the asset—Legal title may indicate to those benefits. However, physical
which party to a contract has the possession may not coincide with
ability to direct the use of, and obtain control of an asset. For example,
substantially all of the remaining in some repurchase agreements
benefits from, an asset or to restrict and consignment arrangements, a

customer or consignee may have ability to direct the use of, and obtain
physical possession of an asset that substantially all of the remaining
the entity controls. Conversely, in benefits from, the asset. To evaluate
some bill-and-hold arrangements, the the effect of a contractual customer
entity may have physical possession acceptance clause on when control of
of an asset that the customer controls. an asset is transferred, an entity shall
Paragraphs 606-10-55-66 through consider the guidance in paragraphs
55-78, 606-10-55-79 through 55-80 606-10-55-85 through 55-88. 2
and 606-10-55-81 through 55-84
This is not an all-inclusive list and an
provide guidance on accounting for
entity may determine that specific
repurchase agreements, consignment
facts and circumstances enable the
arrangements and bill-and-hold
conclusion that control has passed
arrangements, respectively.
to the customer. For example, the
>T
he customer has the significant existence of a customer acceptance
risks and rewards of ownership of the clause in a contract does not necessarily
asset—The transfer of the significant preclude the recognition of revenue for
risks and rewards of ownership of an a particular performance obligation
asset to the customer may indicate until the customer formally accepts
that the customer has obtained the the good or service. If the entity can
ability to direct the use of, and obtain objectively determine that the agreed-
substantially all of the remaining upon specifications have been satisfied,
benefits from, the asset. However, the entity may be able to recognize
when evaluating the risks and revenue for that particular performance
rewards of ownership of a promised obligation prior to receiving confirmation
asset, an entity shall exclude any of the customer’s acceptance.
risks that give rise to a separate
performance obligation in addition to It is also notable that these indicators
the performance obligation to transfer provide more indicators of revenue
the asset. For example, an entity may recognition than the current GAAP, which
have transferred control of an asset relies on a transfer of risk and reward
to a customer but not yet satisfied an model for recognition.
additional performance obligation to
provide maintenance services related Although reasonably straightforward,
to the transferred asset. there may be situations (such as with
synthetic shipping terms) that need
>T
he customer has accepted the asset— to be reassessed as to the timing of
The customer’s acceptance of an asset revenue recognition.
may indicate that it has obtained the

Performance Criterion (a) – simultaneous receipt
and consumption of benefits
obligations satisfied The first criterion would typically be
over time applied in many recurring service

arrangements. For example, an entity
More complex judgments will be contracts with a cleaning service to have
necessary when recognizing revenue its offices cleaned every working day for
from performance obligations a period of one year. This is accounted
satisfied over time. This concept will for as a single performance obligation
be commonly applied by contractors, as it meets one of the definitions of
service entities and professional a performance obligation: “A series
service organizations. It may also of distinct goods or services that are
include manufacturing for certain substantially the same and that have
specialized products made to customer the same pattern of transfer to the
specifications without alternative uses, customer.” Since another entity would
such as in government contracting. not need to re-perform the cleaning
services that the entity has provided at
The standard provides that revenue any point in time, is an indicator that
is recognized over time if any of the the customer simultaneously receives
following criteria are met: and consumes the benefits. The entity
recognizes revenue over time as the
>T
he customer simultaneously receives performance obligation is satisfied.
and consumes the benefits provided by
the entity’s performance as the entity Criterion (b) – creation or
performs (see paragraphs 606-10-55-5 enhancement of an asset that the
through 55-6) customer controls
>T
he entity’s performance creates or The second criterion would be most
enhances an asset (for example, work applicable to contractor-type activities,
in process) that the customer controls such as when an entity agrees to
as the asset is created or enhanced construct an asset and the customer
(see paragraph 606-10-55-7) controls the asset as it is created or
enhanced. One example would be a
>T
he entity’s performance does not contractor constructing a building on
create an asset with an alternative use land owned by its customer. Here, as the
to the entity (see paragraph 606-10-25- building is erected the customer receives
28) and the entity has an enforceable and controls the benefit, such that if the
right to payment for performance entity failed to complete the job, another
completed to date (see paragraph 606- entity would most likely not need to re-
10-25-29) 3 perform the work already provided.
The following paragraphs discuss each
criterion in more detail.

Criterion (c) – creation of an assessment of whether an asset has an
asset with no alternative use and alternative use must be made at contract
enforceable right to payment for inception.
progress
When the entity assesses the enforceable
The third criterion would be applicable to
right to payment, it must consider
many entities that provide customized
contract terms as well as legal issues.
products or services. As stated in the
While the standard does not require the
criterion description above, (i) the
right to full payment at all times during
entity’s performance does not create
the performance period, the right to
an asset with an alternative use to
payment must be at least enough to
the entity; and (ii) the entity has an
compensate the entity for its performance
enforceable right to payment for
to date if the contract is terminated by
performance to date.
the customer or another party for reasons
other than the entity’s failure to perform
For an entity to determine if it is not
as promised. Such compensation is
creating an asset with an alternative
meant to be the cost incurred by the
use, it should consider whether it is
entity to date, plus a reasonable profit
contractually prohibited from redirecting
margin. As stated in the standard with
the use of the asset or if there are
respect to profit margin, the entity should
practical limitations in transferring
be entitled to compensation for either of
the asset readily for alternative uses.
the following amounts:
Practical limitations in the transfer of
the asset for an alternative use might
proportion of the expected profit
>A
include the entity suffering significant
margin in the contract that reasonably
economic consequences to effect such
reflects the extent of the entity’s
a transfer, such as significant rework
performance under the contract
or the necessity to sell the asset at a
before termination by the customer (or
loss. Accordingly, assets with specific
another party)
design elements or assets in remote
locations may be subject to the practical reasonable return on the entity’s
>A
limitations. cost of capital for similar contracts (or
the entity’s typical operating margin
Some examples of contracts that do for similar contracts) if the contract-
not create assets with alternative uses specific margin is higher than the
to the entity may be design services return the entity usually generates
provided by an engineering firm, a from similar contracts 4
contract to build a custom ocean liner
Determining this enforceable right to
to the customer’s specifications or
payment will be complex and subject to
legal or accounting services related to
significant judgments.
the customer. There are many other
examples, and it is important to note the

Example: Application of criterion (c) delivery and acceptance of the machine by
the customer. That is, at a point in time.5
An entity enters into a contract to
construct a specialized machine. The
contract requires an upfront payment of
10 percent of the total, regular progress Measuring progress
payment totaling 50 percent through the
construction period and a final payment of
toward completion
40 percent upon delivery and acceptance
To recognize revenue over time, an
by the customer. The payments are non-
entity must measure its progress
refundable. If the contract is terminated by
toward completion of the obligation.
the customer, the entity is entitled to retain
The objective is that the measure of
any payments made to date. The entity is
progress should “depict an entity’s
not entitled to any further compensation
performance in transferring control
from the customer.
of goods or services promised to the
customer…” The measure used should be
At the inception of the contract, the
consistent with measures used by the
entity assess its rights to payment and
entity for similar performance obligations
determines that, despite the fact that
and consistently used throughout the
the payments are not refundable, these
completion of the promise.
payments do not meet the requirement
that the cumulative amount does not at
Similar to existing GAAP, the standard
all times during the contract represent
permits the use of output or input
an amount to compensate the entity
measures of progress. The determination
for performance to date. As such, even
of which to use should be based on the
though the asset does not have readily
nature of the goods or services being
alternative use to the entity, because of the
transferred. In the case of a construction
lack of an enforceable right to payment
project, an input measure such as cost
for performance to date, the entity cannot
to date as compared to total estimated
recognize performance over time. Instead,
cost might be an appropriate method.
the entity must recognize revenue upon
For a contract to deliver a distinct set of
similar services over a period of
time, such as the cleaning contract
noted above, an output method
To recognize revenue based on the number of cleanings
provided to date would be more
over time, an entity must appropriate.
measure its progress towards The measure of progress should

be reasonable. If the entity does
completion of the obligation. not have sufficient information to
reasonably measure progress, such

as not having a reliable estimate of total performance that were not reflected in
costs to complete a project, it should the price of the contract (e.g., the costs
defer recognition until more reliable of unexpected amounts of wasted
information is determined. materials, labor or other resources
that were incurred to satisfy the
Output methods performance obligation)
Output methods include methods such
>W
hen a cost incurred is not
as units produced, milestones reached,
proportionate to the entity’s progress in
surveys of performance to date, etc. In
satisfying the performance obligation.
evaluating whether to apply an output
In those circumstances, the best
method to measure progress, an entity
depiction of the entity’s performance
should consider whether using the
may be to adjust the input method to
output selected is a faithful depiction
recognize revenue only to the extent
of the entity’s performance to date in
of that cost incurred. For example,
meeting the obligation. One example
a faithful depiction of an entity’s
of an output measure that might not
performance might be to recognize
provide a faithful depiction would be
revenue at an amount equal to the
a situation where only using delivered
cost of a good used to satisfy a
units as a measure of progress may
performance obligation if the entity
ignore work in-progress or finished
expects at contract inception that all of
goods that are controlled by the
the following conditions would be met:
customer (based on contract terms)
but not yet delivered.
1. The good is not distinct
Input methods 2. T he customer is expected to obtain

When using an input method there is an control of the good significantly
inherent limitation on its usefulness as before receiving services related to
there may not be a direct relationship the good
between an entity’s input method and
the delivery of goods or services to its 3. T he cost of the transferred good
customer. For example, when using a is significant relative to the total
cost-based input method, an adjustment expected costs to completely
to the measure of progress may be satisfy the performance obligation
required in the following circumstances:
4. T he entity procures the good
>W
hen a cost incurred does not from a third party and is not
contribute to an entity’s progress in significantly involved in designing
satisfying the performance obligation. and manufacturing the good, but
For example, an entity would not the entity is acting as a principal in
recognize revenue on the basis of accordance with paragraphs 606-
costs incurred that are attributable to 10-55-36 through 55-40 6
significant inefficiencies in the entity’s

One typical example from the The entity purchases the elevators and
construction industry would be they are delivered to the site six months
uninstalled materials. Although the before they will be installed. The entity
advance purchase of construction uses an input method based on cost to
materials leads to a cost input and is part measure progress towards completion. At
of the total costs expected to be incurred, the end of the reporting period, the entity
merely purchasing the materials does not has incurred other costs of $500,000; it
faithfully represent the entity’s progress determines its progress toward completion
towards fulfilling its performance as 20 percent ($500,000 / $2,500,000).
obligations and, therefore, should not be
included in the calculation of measuring The entity calculates revenue to be
progress towards completion. recognized as 20 percent * $3,500,000
($5,000,000-1,500,000) = $700,000 +
Example: Adjustment to cost-based $1,500,000 = $2,200,000. Its cost of
input method goods sold is $500,000 + $1,500,000
= $2,000,000 for a profit to date of
An entity contracts to renovate a building
$200,000. 7
including the installation of new elevators.
The entity estimates the following with In this example, the entity concluded
respect to the contract: that including the costs to procure the
elevators in the measure of progress
Transaction price $5,000,000 would overstate the extent of the
entity’s performance. Consequently, the
Expected costs: entity adjusted its measure of progress
Elevators $1,500,000 to exclude the costs to procure the
elevators from the measure of costs
Other costs $2,500,000 incurred and from the transaction price.
The entity recognizes revenue for the
Total expected $4,000,00
transfer of the elevators in an amount
costs
equal to the costs to procure the
elevators (i.e., at a zero margin).

This example simply illustrates the need of more management judgments than
to regularly evaluate estimates and adjust previously required. In many cases,
accounting accordingly if warranted. the amount billed will not be equal to
the amount of revenue recognized.
The process toward recognizing revenue Management will need to establish
through applying the five elements is now appropriate processes and internal
completed. Most entities will encounter controls over financial reporting (ICFR)
significantly more complexities in to ensure that the integrity of its financial
recognizing revenue than under current reporting is maintained.
GAAP. These include the application
1 ASC 606-10-25-23 5 ASC-606-10-55-(169-172)

2 ASC 606-10-25-30 6 A SC-606-10-55-21
3 ASC 606-10-25-27 7 ASC-606-10-55-(187-192)
4 ASC 606-10-55-11

DISCLOSURES
Historically, revenue disclosures in

financial statements have been quite
minimal. Most entities briefly described The objective of the
that revenue was measured based on
these basic concepts: delivery of the standard is to: "...disclose
goods or services has occurred and
the price has been established. There sufficient information to
is not much useful information in these
disclosures. ASC 606 seeks to change enable users of financial
that by requiring robust disclosure for
the users of the financial statements.
statements to understand
The objective of the standard is to:

the nature, amount,
“…disclose sufficient information to
timing and uncertainty of
enable users of financial statements to
understand the nature, amount, timing revenue and cash flows..."
and uncertainty of revenue and cash
flows…” 1 Entities will accomplish this by
providing qualitative and quantitative
information regarding the entity's
contracts with customers, the estimates While ASC 606 is a principle-based
and judgments the entity used to standard, stating that an entity shall
measure its revenue and the nature of consider what level of detail is necessary
any assets recognized related to the for users to obtain the understanding
costs of obtaining the contracts. described in the objective, it does
ASC 606 Revenue Recognition 48 Disclosures

provide many requirements, which will be > I nformation as to how the
discussed further below. The standard disaggregated revenue disclosure
also provides some relief in that relates to the revenue information
entities may comply with the disclosure provided in the segment disclosures,
requirements through disclosures if ASC 280 is applicable
required by other ASC topics when the
requirements overlap. >T
he extent of the disaggregation
disclosure will depend on the relevant
The disclosures are required to be facts and circumstances of an entity’s
presented for each reporting period for relationship with its customers.
which a statement of comprehensive When determining the extent of the
income is presented. disclosure to provide, an entity should:
The following briefly describes • C

onsider information that is presented
the requirements within the broad outside of the financial statements,
disclosure topics: such as in investor presentations
Contracts with customers • R

eview information to evaluate
operating segment performance
>R
evenue from contracts with
customers shall be disclosed
ssess other similar information
• A
separately from other sources of
revenue, such as interest income >A
SC 606 provides the following
examples of potential categories:
>E
ntities shall disclose any impairment
losses related to receivables from 1. Type of good or service (e.g., major
revenue contracts (bad debts) or other product lines)
contract assets related to contracts
with customers (capitalized contract 2. G eographical region (e.g., country
acquisition costs, assets recognized in or region)
connection with variable consideration, 3. M arket or type of customer (e.g.,
other contract costs such as unbilled government and nongovernment
work in process, etc.) customers)
Disaggregation of revenue 4. Type of contract (e.g., fixed-price

>R
evenue should be disaggregated in and time-and-materials contracts)
a manner that provides users with 5. C ontract duration (e.g., short-term
information on the “…how the nature, and long-term contracts)
amount, timing and uncertainty of
revenues and cash flows are affected
by economic factors” 2

6. Timing of transfer of goods or 3. R evenue recognized in the
services (e.g., revenue from goods or reporting period from performance
services transferred to customers at a obligations satisfied (or partially
point in time and revenue from goods satisfied) in previous periods (e.g.,
or services transferred over time) changes in transaction price) 6
7. S ales channels (i.e., goods sold

> I nformation as to how the timing of
directly to consumers and goods
contract performance relates to the
sold through intermediaries) 3
timing of payment
The guidance provides an exception

> I nformation as to any significant
for entities other than public entities 4
changes in contract balances that
to elect not to provide the quantitative
occurred during the reporting period,
information noted above. However,
including qualitative and quantitative
entities making this election must
information. Examples include:
provide, at a minimum:
1. C
hanges due to business
>R
evenue disaggregated based on the combinations
timing of recognition, over time or at a
point in time, and 2. C
umulative catch-up adjustments
to revenue that affect the
>Q
ualitative information about “… corresponding contract asset
how the nature, amount, timing and or contract liability, including
uncertainty of revenues and cash adjustments arising from a change
flows are affected by economic in the measure of progress, a
factors” 5 change in an estimate of the
transaction price (including any
changes in the assessment of
Contract balances whether an estimate of variable

consideration is constrained) or a
contract modification
>A
n entity shall disclose the following
information related to its contract 3. Impairment of a contract asset
balances:
4. C
hange in the time frame for a
1. The opening and closing balances right to consideration to become
of receivables, contract assets and unconditional (i.e., for a contract
contract liabilities from contracts asset to be reclassified to a
with customers, if not otherwise receivable)
separately presented or disclosed 5. A
change in the time frame for a
2. R evenue recognized in the reporting performance obligation to be satisfied
period that was included in the (i.e., for the recognition of revenue
contract liability balance at the arising from a contract liability)
beginning of the period

>E
ntities other than a public business
entity 7 may elect not to provide the
Transaction
above disclosures related to contract price allocated
balances but, if such an election is
made, they must provide information
to remaining
as to the opening and closing balances performance
obligations
of receivables, contract and assets and
contract liabilities.
>A
n entity shall disclose all of the
following information about its
Performance remaining performance obligations:
obligations 1. The aggregate amount of the

transaction price allocated to the
>A
n entity shall disclose all of the
performance obligations that are
following information about its
unsatisfied (or partially unsatisfied)
performance obligations:
as of the end of the reporting period
1. The significant payment terms 2. A
n explanation of when the entity
(i.e., when payment typically is due, expects to recognize as revenue the
whether the contract has a significant amount disclosed in accordance
financing component, whether the with paragraph 606-10-50-13(a),
consideration amount is variable which the entity shall disclose in
and whether the estimate of variable either of the following ways:
consideration is typically constrained
in accordance with paragraphs 606- – O
n a quantitative basis using
10-32-11 through 32-13) the time bands that would be
most appropriate for the duration
2. T he nature of the goods or services of the remaining performance
that the entity has promised obligations
to transfer, highlighting any
performance obligations to arrange – B y using qualitative information
for another party to transfer goods
>A
s a practical expedient, all entities
or services (that is, if the entity is
may elect not to provide the above
acting as an agent)
information for performance
3. O bligations for returns, refunds and obligations that have an original
other similar obligations expected duration of less than one
year and follow relevant guidance for
4. Types of warranties and related
recognizing revenue over time
obligations 8
>A
n entity shall explain whether it
is applying the practical expedient

and whether or not any variable >A
n entity shall disclose the judgments
consideration subject to the constraint and estimates related to the
is not included in the information about transaction price and allocation of
the transaction price the transaction price to performance
obligations, including:
>A
n entity other than a public business
entity and related similar entities may • H
ow the transaction price including
elect not to provide the disclosures variable consideration was
about remaining performance determined, including issues related
obligations to the time value of money and
the measurement of any non-cash
consideration
Significant • W
hether the constraint on variable
consideration was applied
judgments in the
• How
standalone selling prices were
application of the determined and how discounts and
guidance variable consideration was applied to

specific performance obligations
>A
n entity shall disclose the judgments • How
obligations related to returns,
and estimates (and any related changes) refunds etc. were determined
in applying the guidance in ASC 606
>E
ntities other than public business
that significantly affect the timing and
entities and similar entities may elect
amount of revenue recognized with
not to provide any or all of the following
particular requirements:
disclosures:
• W
ith respect to the timing of
1. P
aragraph 606-10-50-18(b), which
the satisfaction of performance
states that an entity shall disclose,
obligations recognized over time:
for performance obligations
– M
ethods used to recognize such satisfied over time, an explanation of
revenue, input methods or output why the methods used to recognize
methods and the application of either revenue provide a faithful depiction
of the transfer of goods or services
– I nformation as to how the method
to a customer
utilized faithfully represents the
transfer of goods or services 2. P
aragraph 606-10-50-19, which
states that an entity shall disclose,
• W
ith respect to performance
for performance obligations satisfied
obligations satisfied at a point in time,
at a point in time, the significant
the entity shall disclose information
judgments made in evaluating
relevant to its decision as to when the
when a customer obtains control of
customer obtains control
promised goods or services

3. P
aragraph 606-10-50-20, which ...it will be necessary
states that an entity shall
disclose the methods, inputs and for entities to develop
assumptions used to determine the
transaction price and to allocate processes to obtain the
the transaction price. However, if
an entity elects not to provide the required information
disclosures in paragraph 606-10-
50-20, the entity shall provide the
with sufficient internal
disclosure in paragraph 606-10-50-
control...
20(b), which states that an entity
shall disclose the methods, inputs
and assumptions used to assess
whether an estimate of variable Since much of the information required
consideration is constrained. to be disclosed will not come directly
from an entity’s general ledger, it will
Clearly the disclosure requirements be necessary for entities to develop
are much more extensive than those processes to obtain the required
required by current standards. Applying information with sufficient internal
these disclosures will likely present control to provide reasonable certainty
a significant challenge to public as to the accuracy and completeness
business entities and not-for-profit of the information in accordance with
organizations that are conduit debt GAAP. It will also likely require significant
obligors. Unfortunately the standard judgment to determine whether other
itself does not provide any examples of required disclosures may in part satisfy
suggested disclosure formats. This will the above requirements, as well as
enable entities in particular industries to determine how the layout of the
to develop acceptable or best practice disclosures can facilitate the users of the
approaches to the required disclosures, financial statement getting information to
but this will of course take some time. meet the objective.
1 ASC 606-10-50-1 6 A SC 606-10-50-8

2 ASC 606-10-50-5 7 Including not-for-profit conduit debt obligors and
3 ASC 606-10-55-91 benefit plans that file with the SEC
4 I ncluding not-for-profit conduit debt obligors and 8 ASC 606-10-50-12

benefit plans that file with the SEC
5 ASC 606-10-50-5

COST CAPITALIZATION
ASC 606 has resulted in transformational

changes in revenue recognition.
The standard also addresses costs ...incremental costs of
associated with obtaining and fulfilling
revenue from contracts with customers. obtaining a contract
As with revenue recognition itself, the
codification has never comprehensively should be recognized
addressed costs in connection with
contracts. Often, the guidance has
as an asset if the entity
been found within the industry sections expects to recover such
or other disparate sections of the
codification. The new standard seeks to costs through execution
comprehensively address the issue.
of the contract.
Contract cost guidance has been added
to ASC 606 through changes in specific
subtopics.
execution of the contract. The
Incremental costs of incremental costs are those identified

with obtaining a specific contract which
obtaining a contract otherwise would not have been incurred.
A typical example would be a sales
Briefly stated, incremental costs commission. However, there could be
of obtaining a contract should be many others. As long as they directly
recognized as an asset if the entity related to the contract, they should
expects to recover such costs through be capitalized.
ASC 606 Revenue Recognition 54 Cost capitalization

The standard provides a practical
expedient, wherein an entity may
Costs to fulfill
recognize such costs as incurred, if the a contract
amortization period of such asset is less
than one year. In general, an entity should recognize an
asset related to costs incurred to fulfill
Amortization should be provided on a contract if the costs meet all of the
the asset in a manner that reflects following:
the transfer of goods or services
to the customer. The amortization 1. T he costs relate directly to a contract
period should be adjusted if the entity or to an anticipated contract that
anticipates a significant change in the the entity can specifically identify
timing of the transfer. Any such change (i.e., costs relating to services to be
should be accounted for as a change in provided under renewal of an existing
estimate (i.e., prospectively). contract or costs of designing an
asset to be transferred under a
If an entity determines that the specific contract that has not yet been
remaining balance of the unamortized approved)
costs exceeds the remaining amount
of consideration to be received on the 2. T he costs generate or enhance
contract, less the remaining amount of resources of the entity that will be
costs (not yet recognized) to be incurred used in satisfying (or in continuing to
in fulfilling the contract (the remaining satisfy) performance obligations in
margin), the entity shall recognize an the future
impairment charge in profit or loss.
3. T he costs are expected to be
In determining the remaining amount of recovered 1
consideration, the entity shall consider
the guidance related to determining Examples of such costs include:
the transaction price, without regard to
1. D irect labor (e.g., salaries and
the constraining estimate of variable
wages of employees who provide
consideration guidance, adjusted to
the promised services directly to the
reflect the credit risk of the customer.
customer)
Any impairment loss to the asset will be
2. D irect materials (e.g., supplies used in
measured after the entity has considered
providing the promised services to a
impairment losses related to other
customer)
contract assets measured in accordance
with the standard.

3. A
llocations of costs that relate directly
Entities will need to
to the contract or to contract activities
(e.g., costs of contract management carefully assess the
and supervision, insurance and
depreciation of tools and equipment nature of the costs
used in fulfilling the contract)
being incurred in
4. C osts that are explicitly chargeable to
the customer under the contract connection with a
5. O ther costs that are incurred only specific contract and
because an entity entered into
the contract (e.g., payments to measure accordingly.
subcontractors) 2
Entities should expense, as incurred,

general and administrative costs, costs Entities will need to carefully assess
of wasted material or labor not reflected the nature of the costs being incurred in
in the cost of the contract, costs related connection with a specific contract and
to past performance and costs which measure accordingly.
cannot be identified as associated with a
performance obligation. As with other elements of implementing
ASC 606, entities may see differences
Other costs may be in the nature of in historical accounting, especially with
costs associated with other subtopics, respect to previous accounting for the
such as: costs of obtaining a contract. In these
cases, an entity’s internal controls over
1. Inventory costs
financial reporting (ICFR) should be
2. P reproduction costs of long term adapted as necessary to address the
supply agreements decisions made related to such costs,
including how they have been identified
3. I nternal use software and distinguished from routine costs that
4. P roperty, plant and equipment would have been incurred by the entity
whether or not the contract was obtained.
5. D evelopment costs of software to be
sold, leased or marketed
1 ASC 340-40-25-5 2 ASC 340-40-25-7

EFFECTIVE DATES AND
TRANSITION METHODS
For annual periods beginning after Dec. the sale of or for purposes of issuing
15, 2017, the following entities must securities that are not subject to
apply ASC 606: contractual restrictions on transfer
Public business entity, is an entity > I t has issued, or is a conduit bond

meeting any of the below criteria: obligor for, securities that are traded,
listed or quoted on an exchange or an
> It is required by the U.S. Securities and over-the-counter market
Exchange Commission (SEC) to file or
furnish financial statements, or does > I t has one or more securities that are
file or furnish financial statements not subject to contractual restrictions
(including voluntary filers), with the SEC on transfer, and it is required by law,
(including other entities whose financial contract or regulation to prepare U.S.
statements or financial information are GAAP financial statements, including
required to be or are included in a filing) notes, and make them publicly
available on a periodic basis (e.g.,
> I t is required by the Securities interim or annual periods). An entity
Exchange Act of 1934 (the Act), as must meet both of these conditions to
amended, or rules or regulations meet this criterion 1
promulgated under the Act, to file or
furnish financial statements with a Not-for-profit entity, that:
regulatory agency other than the SEC
Has issued, or is a conduit bond obligor
> I t is required to file or furnish financial for, securities that are traded, listed or
statements with a foreign or domestic quoted on an exchange or an over-the-
regulatory agency in preparation for counter market.
ASC 606 Revenue Recognition 57 Effective dates and transition methods

Employee benefit plan, that: a. R
etrospectively in accordance
Files or furnishes financial statements with the following guidance:
with or to the Securities and Exchange In this method, an entity shall apply
Commission (Form 11-K). the new standard retrospectively to
each prior reporting period presented
Note that the definitions used in ASC in accordance with current guidance
606 noted above have not changed from in ASC 250-10-45 (5-10), Change in
current practice in the Codification. The Accounting Principle. In doing so, an
standard must be applied for any interim entity may use one or more of the
periods within the above fiscal years. following practical expedients:
As such for an issuer, the first period
reported in accordance with ASC 606 will 1. A
n entity need not restate contracts
be the first quarter of 2018. that begin and are completed within
the same annual reporting period
All other entities will apply the or completed contracts that have
2. F
guidance for the first annual period variable consideration, an entity
beginning after Dec. 15, 2018 and for may use the transaction price at the
interim reporting periods beginning after date the contract was completed
Dec. 15, 2019. rather than estimating variable
All entities are permitted to adopt consideration amounts in the
earlier, as of annual periods beginning comparative reporting periods
after Dec. 15, 2016. or all reporting periods presented
3. F
before the date of initial application,
an entity need not disclose
Transition methods the amount of the transaction
price allocated to the remaining
The standard provides for two transition performance obligations and an
methods and several practical expedients explanation of when the entity
to provide some relief. In discussing expects to recognize that amount
the transition methods, the standard as revenue (see paragraph 606-10-
provides a specific definition for 50-13)
“completed contracts,” which is to be
used in applying the transition guidance. 4. F
or contracts that were
modified before the beginning
A completed contract is a contract for of the earliest reporting period,
which all (or substantially all) of the presented in accordance with
revenue was recognized in accordance the pending content that links to
with revenue guidance that is in effect this paragraph, an entity need not
before the date of initial application. 2 retrospectively restate the contract
for those contract modifications in

accordance with paragraphs 606-
10-25-12 through 25-13. Instead,
The transition decision
an entity shall reflect the aggregate is an important one
effect of all modifications that occur
before the beginning of the earliest for all entities as it
period presented in accordance with
the pending content that links to will impact the level of
this paragraph when:
effort needed to adopt
i. I dentifying the satisfied and
unsatisfied performance ASC 606.
obligations
ii. Determining the transaction price
iii. A
llocating the transaction price
to the satisfied and unsatisfied statements will be presented in
performance obligations3 accordance with its historical revenue
recognition methods. Additional
If an entity decides to use any of the disclosure is therefore required to
practical expedients, it must apply the provide:
expedients consistently to all the periods
presented and disclose the expedients that 1. The amount by which each financial
were used and a qualitative assessment statement line item is affected in
of the effect of using the expedients, to the the current reporting period by the
extent reasonably possible. application of the pending content
that links to this paragraph as
b. Retrospectively in accordance with compared with the guidance that
the following guidance: was in effect before the change
An entity shall recognize a cumulative
2. A
n explanation of the reasons for
effective change to opening retained
significant changes identified in 14
earnings in the year of adoption of the
standard. An entity may apply this to The transition decision is an important
all contracts as of the date of initial one for all entities as it will impact the
application (e.g., Jan. 1, 2018) or to level of effort needed to adopt ASC 606.
contracts that are not completed. An For public entities which are accelerated
entity shall disclose which approach filers, adopting method A will require
was used. An entity may also apply the restatement of the 2017 and 2016
the practical expedient in (4) above income statements. As such, entities
and provide the relevant disclosures to considering this method should consider
its use. If an entity uses this transition the need to make estimates of the impact
approach, the prior year financial in connection with the preparation of the

calendar 2016 financial statements. The need to consider their SAB 74 disclosures
adjustments will be subject to audit in for 2016 as the SEC has indicated
2018, and therefore internal control over an expectation that the disclosure
financial reporting must be maintained will contain more detail regarding the
as well. The need for parallel accounting expected impact of the adoption and the
records needs to be determined based entity’s decision on the transition method.
on the complexity of an entity's contracts
and the expected impact as a result of the
adopting of ASC 606. Public entities also
1 ASC Master Glossary 3 ASC 606-10-65-1f

2 ASC 606-10-65-1-c-2 4 ASC 606-10-65-1h

INTERNAL CONTROL OVER
FINANCIAL REPORTING AND
AUDITOR EXPECTATIONS
Changes to accounting under ASC 606

will require scrutiny from companies and
their auditors as the new standard is Because ASC 606 is a
implemented.
principles-based standard,
Auditors will be placing increased
emphasis on the internal control there are many more
over financial reporting (ICFR) issues
in connection with annual audits management estimates
covering the initial year of ASC 606
implementation. Auditors of public
and judgments required
companies may begin their assessment
compared to previous
of management’s plans during the 2017
audit cycle. The level of attention will accounting standards.
be on a spectrum, with accelerated
filers receiving the most attention in
connection with integrated audits.
Because ASC 606 is a principles- required. Current revenue recognition

based standard, there are many more controls must be adjusted to enable
management estimates and judgments adequate documentation and control to
required compared to previous support the judgments.
accounting standards. The time and
effort necessary to implement the new Entities are expected to follow an
standard due to these judgments will established framework when designing
be substantial. Many organizations are ICFR, and in the United States the
unprepared for the changes to their accepted framework is COSO. 1 The five
systems and processes that will be Committee of Sponsoring Organizations
ASC 606 Revenue Recognition 61 Internal control over financial reporting

of the Treadway Commission (COSO) >H
as performed an assessment of the
components and the 17 principles risks associated with the adoption
thereunder can be a good framework
>U
nderstands how an entity’s unique
for adjusting ICFR to the demands of
revenue streams may be impacted by
ASC 606. Below we provide specific
the standard
considerations related to ASC 606 for
each COSO element. >C
onsidered the transition method and
the risks related to that choice
Control environment considerations
>U
nderstands the risks associated
Does management, including the with dual accounting records for a
board, understand the new standard period of time
and the impacts it may have on the
organization? This is a key piece in the >A
dequately considered the controls to
control environment and sets the tone deploy for transition accounting
for the organization. >C
onsidered the need for new or revised
controls to address the five steps of
>M
anagement and the board have
revenue recognition
obtained an understanding of the new
standard >C
onsidered the need for new or revised
controls to adequately address the
> I nternal audit has been informed of the
enhanced disclosure requirements
upcoming changes and is involved with
the change process Organizations will need to design and
>A
dequate personnel resources have implement new controls to address the
been allocated to the process new processes and judgments they
adopt to implement ASC 606.
• P
ersonnel have received training
and understand the entity’s
revenue streams
• C
ross functional teams have been Organizations will
organized
need to design and
>C
hange management processes
are in place implement new
Risk assessment considerations controls to address
The organization will need to fully
the new processes and
understand and weigh the risks adoption
of the new accounting standard will pose. judgments they adopt...

Control activities considerations 3. D etermining the transaction price
New control activities will be required >S

upporting the estimation of variable
addressing the five elements and the consideration
related estimates and judgments.
>A
pplying the probability weighted
These will also likely include more
approach or the most likely outcome
documentation supporting the estimates
approach
and may include more entity level controls
than previously deemed necessary. >D
etermining the probability of
constraint on variable consideration
Specific control activities related to
>A
ssessing the fair value of non-cash
the ASC 606 five elements
consideration
1. I dentifying the contract >A

ddressing issues related to finance
component for long term contracts
>S
upporting contract recognition
for oral agreements >P
eriodically reassessing variable
consideration
• Considering legal issues
>A
ssessing amounts due to
> Determining collectibility
customers (refund liabilities)
• S
tandard credit verification
>H
andling catch-up revenue
processes
adjustments
• E
xpanded processes when implicit
>H
andling variable consideration
price considerations are in play
when ERP cannot
>E
valuating whether contracts should
be combined 4. A llocating the transaction price
ssessing specific accounting for
>A > Supporting standalone selling prices
contract changes
• E
stimating when not sold
>F
or contracts not recognized: separately
reassessment processes
> Applying discounts
2. I dentifying performance obligations • Proportionately
> Determining the promises in a contract • T

o selected performance
obligations
• Explicit as well as implicit promises
>A
pplying changes to allocation
>D
etermining whether a performance
when estimated variable
obligation is distinct in the context of
consideration changes
the contract
>A
ssessing warranties: implied,
explicit and extended

5. R ecognizing revenue > Qualitative disclosures
>D
etermining whether to recognize at •S
ignificant estimates and judgments:
a point in time or over time variable consideration, financing
element, applying the constraint
>S
upporting the criteria for passage of
and releasing the constraint, how
control for over time recognition
discounts were applied, how refund
• D
etermining whether the obligations were determined, etc.
consideration subject to an
enforceable right matches cost Transition considerations
plus margin
Organizations will need to determine
> Recognition pattern how they will transition to the new
accounting standard. Beyond the
• I nput measures—subject to
determination of which transition
constraints
method to employ, organizations will
• Output measures—reflective need to take a close look at how they will
of progress toward contract accomplish the documentation during
completion the transition period of actual accounting
and management’s determinations and
Many organizations are unprepared for judgments.
the amount of time disclosures will now
take; each judgment will need adequate >P
rocess for dual accounting records
disclosure in the financial statement. during the transition period(s):
aintaining integrity and reliability of
•M
Disclosure considerations
offline record keeping processes
Under ASC 606, disclosures are extremely
•E
ntity level reviews for estimates and
robust. This is an area for which
related judgments
organizations should allow additional
time and effort during implementation >S
upport for applying any practical
and in the early years of adoption. expedients
>C
ontrols over disclosure information not >S
EC issuers have current period
in accounting records: disclosures required under SAB 74 (SAB
Topic 11.M); non-SEC issuers should
• Uncompleted contracts also consider engaging stakeholders
•C
hanges in contracts: cumulative to communicate transition plans
catch-up adjustments and potential effects on the financial
statements

Information and communication
considerations ICFR and ERP system
The information needs of ASC 606 and
changes should be
the transition are extensive. Companies
will need to gather information addressed as soon as
that previously did not need to be
documented as part of the accounting possible to achieve a
process and may not exist in easy to
access or consistent locations. smooth and compliant
>W
ill likely need to be gathered from transition...
across the organization: contracts,
implied promises, side deals, etc.
>A
ssessing completeness and accuracy need to have robust controls in place to
of such data will be critical avoid disclosing material weaknesses in
Section 404 reports
Monitoring activity considerations
>N
ot-for-profit organizations subject
Monitoring activity is likely to be
to Yellow Book requirements will also
increased both on an ongoing basis and
need to have robust controls to avoid
as it relates to the transition process.
deficiencies in internal control reporting
The internal audit function, management
and potential additional attention from
and board are likely to have roles in
oversight agencies
the monitoring function. Organizations
should prepare to incorporate this The adoption of ASC 606 will present
activity across functions. significant challenges to existing ICFR
systems. Many companies are likely
Additional considerations
to find that their enterprise resource
>T
he early effective date (Jan. 1, 2018) planning (ERP) systems were not
applies to public companies and not- designed to capture or report the
for-profit organizations that are conduit information required for ASC 606
debt obligors accounting and disclosures. ICFR
and ERP system changes should
>E
xternal auditors and regulators
be addressed as soon as possible
are highly likely to pay more critical
to achieve a smooth and compliant
attention to ICFR throughout
transition to ASC 606. Organizations
implementation of ASC 606
should begin to evaluate the time and
>P
ublic companies subject to Sarbanes- effort the implementation will require of
Oxley (SOX) reporting requirements will their internal staff and external vendors.
1 Currently Internal Control — Integrated Framework, which was issued in May 2013 and effective on Dec. 15, 2014,
published by COSO. The 2013 COSO framework superseded the 1992 framework.

ABOUT THE AUTHOR
Industry involvement
>A
merican Institute of Certified Public
Accountants (AICPA)
>A
ICPA Financial Reporting Executive
Committee (FinRec)
>A
ICPA Private Companies Practice
Section, Technical Issues Committee
(TIC), past chair
>A
ICPA Auditing Standards Board,
Special Considerations - Audits of
Philip Santarelli, CPA, is a partner Group Financial Statements (including
emeritus at Baker Tilly. His experience the Work of Component Auditors) (AU-
includes leadership within the audit and C 600) task force
accounting practice, risk management,
>C
enter for Audit Quality, Professional
quality assurance and technical
Practice Executive Committee and
resources and capabilities – including
Smaller Firm Task Force, chair
ASC 606.
>P
ublic Company Accounting Oversight
As past chair of the American Institute
Board, Standing Advisory Group
of Certified Public Accountants’
private companies section technical > F inancial Accounting Standards Board
issues committee, he interfaced with
accounting and auditing standard >F
ASB Private Company Financial
setters and provided comments and Reporting Resource Group
perspectives on the impact of accounting
standards for private companies. ASB NFP Financial Reporting
>F
Resource Group
ASC 606 Revenue Recognition 66 About the author

ABOUT BAKER TILLY
Baker Tilly Virchow Krause, LLP (Baker Tilly) is a nationally recognized, full-service
accounting and advisory firm whose specialized professionals connect with clients and
their businesses through refreshing candor and clear industry insight.
With approximately 2,700 employees across the United States, Baker Tilly is ranked as one
of the 15 largest accounting and advisory firms in the country. Headquartered in Chicago,
Baker Tilly is an independent member of Baker Tilly International, a worldwide network
of independent accounting and business advisory firms in 147 countries with 30,000
professionals. The combined worldwide revenue of independent member firms is $3.2 billion.
ASC 606 services

What revenue streams should you be focusing on?
Risk You need to understand what your current revenue stream types are
assessment
and which of those revenue streams pose a risk of high impact.
How will your systems, processes, controls be affected?

Impact Once your revenue streams are identified, our team will work with your stakeholders
assessment
to begin a detailed inventory and assessment of your contract types, specifically
focusing on those contract types identified in the initial assessment as high impact.
What will need to be addressed to comply with ASC 606?

Gap Based on the impact assessment, our professionals will analyze processes,
analysis
systems, controls and reports for gaps between what is currently in place and
what will need to be done to comply.
What is the right path for your company to pursue?

Roadmap Our multidisciplinary team will work with you to discuss strategy options, determine
development
a plan that is the right fit for your organization and develop the project plan to
implement your strategy.
What should you expect in implementing your solution?

Implementation Once your strategy is determined and a plan established, our project management
and change management professionals will assist you in an implementation plan
managed specifically to your organization's culture and its needs.
Have you addressed all controls?

Internal After your solution has been implemented, internal controls must be tested and
controls
evaluated for deficiencies. As part of your ongoing management and testing, our
evaluation
professionals can assist with evaluation of your revenue-related internal controls
against the COSO 2013 framework.
ASC 606 Revenue Recognition 67 About Baker Tilly

Connect with us:
bakertilly.com/asc606
cpa@bakertilly.com
800 362 7301
LinkedIn: Baker Tilly Virchow Krause, LLP
Twitter: @BakerTillyUS
Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. The
information provided here is of a general nature and is not intended to address specific circumstances of any individual or entity. In
specific circumstances, the services of a professional should be sought. © 2017 Baker Tilly Virchow Krause, LLP

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ASC 606 REVENUE

04 A revenue recognition primer

07 Identifying the contract

14 Identifying performance obligations

21 Determining the transaction price

31 Allocating the transaction price

57 Effective dates and transition methods

61 Internal control over financial reporting

66 About the author

67 About Baker Tilly

ALAN D. WHITMAN CHRISTINE M. ANDERSON

ASC 606 Revenue Recognition 3 Introduction

View the recorded webinar on this topic

The objective of the project was

ASC 606 Revenue Recognition 4 A revenue recognition primer

I dentify the performance >C

ASC 606 Revenue Recognition 5 A revenue recognition primer

ASC 606 Revenue Recognition 6 A revenue recognition primer

View the recorded webinar on this topic

ASC 606 Revenue Recognition 7 Identifying the contract

ASC 606 Revenue Recognition 8 Identifying the contract

ASC 606 Revenue Recognition 9 Identifying the contract

ASC 606 Revenue Recognition 10 Identifying the contract

• I f the remaining goods or services In accordance with the guidance, the

ASC 606 Revenue Recognition 11 Identifying the contract

The entries to reflect this modification are as follows:

Contract revenue $900

Contract liability $900

To reflect the credit related to the defective units

Accounts receivable $6,000

Contract revenue $5,600

Contract liability $400

Accounts receivable $1,500

Contract revenue $2,800

Contract liability $1,300

ASC 606 Revenue Recognition 12 Identifying the contract

1 ASC 606-10-25-12 5 ASC 606-10-25-12

ASC 606 Revenue Recognition 13 Identifying the contract

View the recorded webinar on this topic

Once an entity has determined that it has

b. A series of distinct goods or services embodied in the customer invoice, is

ASC 606 Revenue Recognition 14 Identifying performance obligations

Note that performance obligations do Distinct goods

1. Sale of goods produced by an entity

tasks that an entity 3. R esale of rights to goods or

ASC 606 Revenue Recognition 15 Identifying performance obligations

ASC 606 Revenue Recognition 16 Identifying performance obligations

If the promises do not meet the Distinct goods and services

ASC 606 Revenue Recognition 17 Identifying performance obligations

The entity thus determines the contract

ASC 606 Revenue Recognition 18 Identifying performance obligations

Warranties by law: If the entity is required by law

ASC 606 Revenue Recognition 19 Identifying performance obligations

1 ASC 606-10-25-18 6 Derived from ASC 606-10-55-(146-150)

ASC 606 Revenue Recognition 20 Identifying performance obligations

View the recorded webinar on this topic

ASC 606 Revenue Recognition 21 Determining the transaction price

Expected value method

Units sold Price Probability Weighted average units

490 9 75% 368

ASC 606 Revenue Recognition 22 Determining the transaction price

Accounts receivable $1,000

Contract liability $77

I dentify the performance >C

• I f the remaining goods or services In accordance with the guidance, the

b. A series of distinct goods or services embodied in the customer invoice, is

1. Sale of goods produced by an entity

tasks that an entity 3. R esale of rights to goods or

1 ASC 606-10-25-18 6 Derived from ASC 606-10-55-(146-150)

e. T he contract has a large number and

1 ASC 606-10-32-8 4 ASC 606-10-32-16

6 A s discussed in the previous section, recognition 1 1 ASC 606-10-32-45