The ASC 606 five-step model with examples

The best way to learn the five steps is to take one contract all the way through them. This ASC 606 example uses a software-as-a-service deal, the most common case behind searches for SaaS revenue recognition, with an upfront invoice, a discount and two promises delivered at different times.

By Hamza Fida, Chartered Accountant. Reviewed by Mirza Fahad Baig, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

The ASC 606 five-step model, often searched as the ASC 606 5 steps, is: identify the contract, identify the performance obligations, determine the transaction price, allocate the price to the performance obligations, and recognize revenue as each obligation is satisfied. In this guide's SaaS example, a $135,000 contract for a one-year subscription and implementation is split by standalone selling price into $108,000 of subscription revenue, $9,000 a month, and $27,000 of implementation revenue.

At a glance

Step 1
Identify the contract
Step 2
Identify performance obligations
Step 3
Determine the transaction price
Step 4
Allocate on standalone selling price
Step 5
Recognize as obligations are satisfied
Excel
Revenue allocation calculator
The ASC 606 five-step model with examplesStep 1: Identify the contract; Step 2: Identify performance obligations; Step 3: Determine the transaction price; Step 4: Allocate on standalone selling price; Step 5: Recognize as obligations are satisfied; Excel: Revenue allocation calculator.KEY FACTS AT A GLANCEThe ASC 606 five-step model with examplesStep 1Identify the contractStep 2Identify performanceobligationsStep 3Determine the transactionpriceStep 4Allocate on standaloneselling priceStep 5Recognize as obligationsare satisfiedExcelRevenue allocationcalculatorChecked against official sourcesTax BakersThe ASC 606 five-step model with examplesStep 1: Identify the contract; Step 2: Identify performance obligations; Step 3: Determine the transaction price; Step 4: Allocate on standalone selling price; Step 5: Recognize as obligations are satisfied; Excel: Revenue allocation calculator.KEY FACTS AT A GLANCEThe ASC 606 five-step model withexamplesStep 1Identify the contractStep 2Identify performance obligationsStep 3Determine the transaction priceStep 4Allocate on standalone selling priceStep 5Recognize as obligations are satisfiedExcelRevenue allocation calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

Applying the ASC 606 five-step model: what does the contract say?

A SaaS company signs a one-year contract on January 1 for access to its platform and an implementation project that configures the platform and migrates the customer's data. The customer pays $135,000 upfront. Sold separately, the company charges $120,000 for a year's subscription, and other consultants also offer the implementation service, which the company prices at $30,000 on its own.

The ASC 606 5 steps, applied to a SaaS contractThe ASC 606 5 steps, applied to a SaaS contract1Identify thecontract1-year SaaScontract signed2Identify theobligationsSubscription andimplementation3Determinethe price$135,000 forthe contract4Allocatethe pricePlatform $108kSetup $27k5Recognizerevenue$9,000 a month,setup in 2 months
One SaaS contract taken through all five steps.

Step 1: Is there a contract under ASC 606?

Under ASC 606-10-25-1, a contract exists if the parties have approved it, rights and payment terms are identifiable, it has commercial substance, and it is probable the company will collect the consideration. Under US GAAP, probable means likely to occur, a higher bar than under IFRS 15. The signed contract with a creditworthy customer passes.

Step 2: What are the performance obligations?

The subscription and the implementation are each distinct: the customer can benefit from the platform without the company's implementation, because other providers can do it, and the implementation does not significantly modify the software. So there are two performance obligations. If the implementation were only setup activity that transfers nothing to the customer, or so specialized that only the company could do it, the answer could be one obligation.

Step 3: What is the transaction price?

$135,000, fixed. There is no variable consideration, such as usage fees or service credits, and no significant financing component because payment is within a year of performance.

Step 4: How is the price allocated by standalone selling price?

Performance obligationStandalone selling priceShareAllocated price
Subscription, 12 months$120,00080%$108,000
Implementation$30,00020%$27,000
Total$150,000100%$135,000

The $15,000 discount is shared in proportion to standalone selling prices, even though the sales team may think of it as a discount on implementation.

Step 5: When is revenue recognized?

The subscription is a stand-ready obligation satisfied evenly over the year, so $9,000 is recognized each month. The implementation takes two months and is recognized as the work is performed, here $13,500 a month in January and February.

Deferred revenue entries ($)Deferred revenue entries ($)January 1: invoice paid upfrontDebitCreditDr Cash135,000.00Cr Deferred revenue135,000.00January 31: first monthDebitCreditDr Deferred revenue22,500.00Cr Subscription revenue9,000.00Cr Implementation revenue13,500.00
Cash arrives on day one; revenue follows the service and the implementation work.

At the end of March, revenue recognized is $54,000 and deferred revenue is $81,000. The Revenue allocation calculator (Excel) produces this monthly schedule for any mix of obligations.

What are common ASC 606 mistakes in SaaS?

  • Recognizing implementation fees upfront when the work has not been performed.
  • Treating every setup fee as a separate obligation, when it often transfers nothing distinct and is recognized over the subscription term instead.
  • Using list prices instead of standalone selling prices supported by actual sales.
  • Ignoring variable consideration such as service level credits or usage overages. More SaaS-specific cases are in ASC 606 for SaaS companies.

Is the five-step model the same under IFRS 15?

Yes. The steps are identical; the main wording difference is that IFRS uses "stand-alone" and US GAAP "standalone". See the IFRS 15 five-step model and ASC 606 revenue recognition explained.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply US GAAP and IFRS to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What are the 5 steps of ASC 606?

Identify the contract, identify the performance obligations, determine the transaction price, allocate the price to the obligations, and recognize revenue as each is satisfied.

How is SaaS revenue recognized under ASC 606?

Subscription revenue is usually recognized evenly over the subscription term; distinct implementation services are recognized as the work is performed.

What is a standalone selling price?

The price at which the company would sell a good or service separately to a customer, used to allocate the contract price.

Is an implementation fee a separate performance obligation?

Only if the implementation is distinct. Setup activities that transfer nothing to the customer are combined with the subscription.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. FASB Accounting Standards Codification: Topic 606, Revenue from Contracts with Customers
  2. Financial Accounting Standards Board: Revenue recognition

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

ASC 606ASC 606 revenue recognition explainedIFRS 15The IFRS 15 five-step model with examplesIFRS 15Identifying performance obligations under IFRS 15

More in ASC 606

Next in this topicPrincipal vs agent under ASC 606TopicAll 5 guides in ASC 606

This guide is general information. It is not tax or legal advice for your situation.