FASB ASC 606 Revenue Recognition Master Guide

Step 1: Identify the Contract with a Customer

A contract exists under ASC 606 when all parties approve the agreement, payment terms and commercial substance are identified, and collection of substantially all consideration is probable.

Step 2: Identify Performance Obligations

Evaluate distinct goods or services promised in the contract (e.g. software licenses vs annual maintenance & support vs professional setup services).

Step 3: Determine the Transaction Price

Calculate total expected consideration, incorporating variable consideration (discounts, rebates, performance penalties) using expected value or most likely amount methods.

Step 4: Allocate Transaction Price to Performance Obligations

Allocate transaction price relative to the Standalone Selling Price (SSP) of each distinct performance obligation at contract inception.

Step 5: Recognize Revenue as Obligations are Satisfied

Recognize revenue over time (ratable subscription software) or at a point in time (hardware transfer of control).

Contract Value: $120,000 Total (1-Year SaaS + Implementation)
- Software License SSP: $100,000 (Satisfied Ratably Over 12 Months)
- Professional Setup SSP: $20,000 (Satisfied Month 1)

Month 1 Journal Entry:
Debit: Cash / Accounts Receivable ($120,000)
Credit: Professional Setup Revenue ($20,000)
Credit: Deferred Revenue liability ($100,000)

Months 2–12 Amortization Entry (Per Month = $8,333.33):
Debit: Deferred Revenue ($8,333.33)
Credit: Earned Subscription Revenue ($8,333.33)