What is ASC 606?
ASC 606 is Topic 606 of the FASB Accounting Standards Codification, the source of authoritative US GAAP. It replaced most industry-specific revenue guidance with one model for contracts with customers. Leases, insurance contracts, financial instruments, guarantees other than product or service warranties, and certain nonmonetary exchanges fall under other topics.
The FASB issued it as ASU 2014-09, converged with IFRS 15. After a one-year deferral in ASU 2015-14, public business entities adopted it for annual periods beginning after December 15, 2017. Most private companies followed a year later, and ASU 2020-05 let those that had not yet issued financial statements reflecting adoption elect to defer one more year.
What is the core principle of ASC 606?
Recognize revenue to depict the transfer of promised goods or services to customers, in an amount that reflects the consideration the company expects to be entitled to in exchange (ASC 606-10-05-3). Two points matter most. Revenue follows the transfer of control, regardless of when the invoice goes out or the cash comes in. And the amount is what the company expects to be entitled to, which can differ from the contract price.
What are the five steps of ASC 606?
| Step | The question it answers | Where the judgment usually sits |
|---|---|---|
| 1. Identify the contract | Is there an enforceable contract with a customer? | Collectibility, side agreements, combining contracts entered into at or near the same time |
| 2. Identify the performance obligations | What distinct goods or services did we promise? | Whether implementation or setup is distinct, material rights, series guidance, principal vs. agent (nature of the promise) |
| 3. Determine the transaction price | How much do we expect to be entitled to? | Variable consideration and the constraint, financing components, payments to customers |
| 4. Allocate the transaction price | How much of the price belongs to each obligation? | Standalone selling prices when nothing is sold separately, allocating discounts |
| 5. Recognize revenue | When is each obligation satisfied? | Over time vs. point in time, the measure of progress |
When is revenue recognized over time vs. at a point in time?
Over time, if any one of three criteria in ASC 606-10-25-27 is met: the customer receives and consumes the benefit as the company performs, the company's work creates or enhances an asset the customer controls, or the work creates an asset with no alternative use and the company has an enforceable right to payment for performance to date. If none is met, revenue is recognized at the point in time control transfers, using the indicators in ASC 606-10-25-30, such as a present right to payment, legal title, physical possession, risks and rewards of ownership, and customer acceptance.
What does ASC 606 look like on a real contract?
Take an illustrative software contract signed January 1: a 12-month hosted (SaaS) subscription that the customer accesses online and cannot take possession of, and a one-week onsite training course, for a total of $126,000 billed up front. The vendor sells the subscription on its own for $120,000 and the training for $20,000.
The customer can benefit from the training together with the subscription it receives under the contract, and the vendor sells training separately, so the training is capable of being distinct (ASC 606-10-25-20). It is also separately identifiable: the vendor does not combine the two into a single output, the training does not modify or customize the software, and neither significantly affects the other (ASC 606-10-25-21).
| Performance obligation | Standalone selling price | Allocated price | Pattern |
|---|---|---|---|
| Subscription | $120,000 | $108,000 | Over time, $9,000 a month |
| Training | $20,000 | $18,000 | Over time as delivered, completed in January |
| Total | $140,000 | $126,000 |
The $14,000 discount is allocated proportionately to both obligations (ASC 606-10-32-36). The exception in ASC 606-10-32-37 would put the whole discount on one or more, but not all, obligations. That exception requires the vendor to regularly sell a bundle of some of the obligations at a similar discount, and Deloitte notes it would typically apply only to contracts with at least three performance obligations. This contract has two.
Payment is due at signing and the contract can't be canceled, so the company has an unconditional right to payment and records a $126,000 receivable and a $126,000 contract liability. If payment were due on net 30 terms, it would record the receivable on the due date instead (ASC 606-10-45-4 and Example 38). By then January's $27,000 is earned, so the contract liability would be $99,000. At the end of January, it moves $27,000 to revenue: $9,000 of subscription and the full $18,000 of training. Because the time between payment and performance is one year or less, the vendor uses the practical expedient in ASC 606-10-32-18 and does not adjust for financing.
The memo for this contract has to answer the questions a reviewer will ask. Why is the training distinct? Where did each standalone selling price come from? Why does the discount not belong to one obligation? Those answers, backed by the SSP evidence and the paragraph citations, are what an auditor will test.
What disclosures does ASC 606 require?
- Disaggregated revenue by categories that show how economic factors affect its nature, amount, timing and uncertainty (ASC 606-10-50-5).
- Contract balances: opening and closing receivables, contract assets and contract liabilities, and revenue recognized from the opening liability (ASC 606-10-50-8).
- Remaining performance obligations: the price allocated to unsatisfied obligations and when the company expects to recognize it (ASC 606-10-50-13).
- Significant judgments about timing, the transaction price and amounts allocated to obligations (ASC 606-10-50-17), plus capitalized contract cost disclosures (ASC 340-40-50-1 through 50-6).
Nonpublic entities can elect to skip the remaining performance obligation disclosures entirely, give only opening and closing contract balances, and replace the quantitative disaggregation with, at a minimum, revenue split by timing of transfer plus qualitative information about how economic factors affect revenue (ASC 606-10-50-7, 50-11 and 50-16). For SEC registrants, recurring staff comment topics include identifying performance obligations, principal vs. agent conclusions, disaggregation and the significant judgments disclosure.
Where do teams get ASC 606 wrong?
- Principal vs. agent. Gross or net turns on whether the company controls the good or service before it transfers to the customer (ASC 606-10-55-36 through 55-40).
- Contract modifications. A change is a separate contract if it adds distinct goods or services at standalone selling prices. Otherwise it is accounted for prospectively if the remaining goods or services are distinct from those already transferred, or by cumulative catch-up if they are not (ASC 606-10-25-10 through 25-13).
- Variable consideration. Estimates are included only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved (ASC 606-10-32-11).
- Material rights. An option to buy future goods or services is a material right, and a separate performance obligation, when it gives the customer a discount it would not get without the contract, such as one beyond the range typically offered to that class of customer (ASC 606-10-55-41 through 55-45).
- Costs to obtain a contract. Incremental costs to obtain a contract, such as sales commissions, are capitalized if the company expects to recover them (ASC 340-40-25-1 through 25-3). A company may elect to expense them when the amortization period is one year or less (ASC 340-40-25-4), but that period includes expected renewals, so a commission on a 12-month SaaS contract often still has to be capitalized.
More detail on each is in 5 common ASC 606 pitfalls.
How does Gaapio help with ASC 606?
Gaapio is an AI-powered technical accounting platform built by CPAs. For revenue contracts, it reads the agreement, asks follow-up questions before drafting, and writes the five-step analysis and ASC 606 memo with clickable citations to the licensed FASB Codification. Your team reviews and signs the conclusion. See how it works on the ASC 606 revenue recognition software page, or request a demo and bring a contract you're working through now.
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References: FASB ASC 606, Revenue from Contracts with Customers (606-10-05-3, 606-10-10-4, 606-10-15-2, 606-10-25-10 through 25-13, 606-10-25-19 through 25-21, 606-10-25-27, 606-10-25-30, 606-10-32-11, 606-10-32-18, 606-10-32-36 and 32-37, 606-10-45-4, 606-10-50-5, 50-7, 50-8, 50-11, 50-13, 50-16 and 50-17, 606-10-55-36 through 55-45, Example 38); FASB ASC 340-40-25-1 through 25-4 and 340-40-50-1 through 50-6; FASB ASC 958-605; ASU 2014-09; ASU 2015-14; ASU 2016-08; ASU 2020-05; IFRS 15 (for comparison); Deloitte Roadmap: Revenue Recognition; PwC Revenue from contracts with customers guide; Deloitte Roadmap: SEC Comment Letter Considerations. This page is general information, not accounting advice for a specific entity.
Written and maintained by the Gaapio team of CPAs. Last reviewed October 2026.