ASC 606 is the current revenue recognition standard applicable to all companies reporting under GAAP. The standard can be nuanced, and it is important for every company to analyze the standard against their operations.
The standard includes five steps the Company needs to go through when determining the appropriate revenue recognition method:
Identify the contract with a customer: Determine if a contract exists and if so, the rights and obligations of the parties involved.
2. Identify the performance obligations: Determine the promises made in the contract that are performance obligations and that transfer a good or service to the customer.
3. Determine the transaction price: Establish the price for the goods or services promised in the contract.
4. Allocate the transaction price to the performance obligations: Assign the transaction price to each performance obligation based on its relative standalone selling price.
5. Recognize revenue when (or as) the entity satisfies a performance obligation: Recognize revenue when the entity has fulfilled its promise to transfer a good or service to the customer, which is typically when the customer has the right to use or consume the promised item.