ASC 606 revenue recognition summary: what does it require?
The core principle is to 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. Revenue follows the transfer of control, not the invoice or the cash. The FASB issued the standard in May 2014 as ASU 2014-09, jointly developed with the IASB, and amended it several times before it took effect.
What is the ASC 606 five-step model?
Each step has detailed guidance in the Codification. Step 2, identifying performance obligations, and step 4, allocating the price on the basis of standalone selling prices, involve the most judgment. See the ASC 606 five-step model with examples.
What does ASC 606 cover?
All contracts with customers except leases (ASC 842), insurance contracts (ASC 944), financial instruments and guarantees, and certain nonmonetary exchanges between companies in the same line of business. Sales of nonfinancial assets that are not outputs of ordinary activities, such as selling a building, follow ASC 610-20, which uses many of the same principles.
Deferred revenue, contract assets and receivables
| Term | When it arises | Example |
|---|---|---|
| Receivable | An unconditional right to payment; only time must pass | An invoice due in 30 days |
| Contract asset | Performance done, but payment depends on something other than time | Revenue on a milestone contract before the milestone is billed |
| Contract liability, usually called deferred revenue | Payment received or due before performance | An annual software subscription billed in advance |
The standard's term is contract liability, but most US companies label it deferred revenue on the balance sheet. Subscription businesses see this most; see ASC 606 for SaaS companies.
A worked example
On July 1, a company bills a customer $12,000 for a one-year support contract, paid upfront. It records $12,000 of deferred revenue, then recognizes $1,000 of revenue each month as the support is provided. At December 31, revenue for the year is $6,000 and deferred revenue is $6,000. Under ASC 605 the answer would have been the same for this simple case; the differences show up in bundles, variable pricing and licenses.
What changed from ASC 605?
ASC 605 had broad principles plus hundreds of pieces of industry-specific guidance, such as the software rules that required vendor-specific objective evidence (VSOE) of fair value before revenue could be split. ASC 606 replaced them with one model: standalone selling prices can be estimated, variable consideration is estimated rather than waiting for it to become fixed, and more disclosure is required.
ASC 606 vs IFRS 15: what is different?
A fuller comparison is in IFRS 15 vs ASC 606.
| Area | ASC 606 | IFRS 15 |
|---|---|---|
| Collectibility threshold for a contract | Probable, meaning likely to occur: a higher bar | Probable, meaning more likely than not |
| Licenses of intellectual property | Functional or symbolic IP | Right to access or right to use |
| Shipping and handling after control passes | May be treated as a fulfillment cost | Assessed as a possible performance obligation |
| Sales taxes | May exclude all sales taxes from the transaction price | Assessed tax by tax |
| Reversal of impairment of contract costs | Not allowed | Allowed |
See IFRS 15 explained and IFRS vs US GAAP: the key differences. For contract costs, see ASC 340-40; for gross or net revenue, principal vs agent under ASC 606.
Are there simplifications for private companies?
Mostly in disclosures. Private companies can omit some quantitative disclosures, such as the amount of the price allocated to remaining performance obligations, and give less detail on contract balances. There are also a few targeted practical expedients, for example for private company franchisors. The five-step model itself is the same.
What do companies disclose?
Disaggregated revenue, contract balances, remaining performance obligations and significant judgments. Private companies may elect simpler disclosures, for example omitting the quantitative information on remaining performance obligations. To model your own contracts, use the Revenue allocation calculator (Excel).
Need help applying the standards?
Our Chartered Accountants help finance teams and students apply US GAAP and IFRS to real transactions.
Questions people ask
What is ASC 606?
The US GAAP revenue standard, Topic 606 of the FASB Codification, which recognizes revenue when control of goods or services transfers to the customer, using a five-step model.
What are the five steps of ASC 606?
Identify the contract, identify the performance obligations, determine the transaction price, allocate it, and recognize revenue as each obligation is satisfied.
Is deferred revenue the same as a contract liability?
Yes. ASC 606 uses the term contract liability; deferred revenue is the label most US companies use for it.
What is the difference between ASC 606 and IFRS 15?
They are substantially converged. Differences include the collectibility threshold, licenses, shipping and handling, sales taxes and reversal of contract cost impairments.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
- FASB Accounting Standards Codification: Topic 606, Revenue from Contracts with Customers
- Financial Accounting Standards Board: Revenue recognition
- IFRS Foundation: Jurisdiction profile, United States
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.
Related guides
More in ASC 606
This guide is general information. It is not tax or legal advice for your situation.