The 5-step model
- Identify the contract with a customer
- Identify the performance obligations — distinct promises to transfer goods/services
- Determine the transaction price — including variable consideration, financing components, noncash consideration
- Allocate the transaction price to each performance obligation based on relative standalone selling price
- Recognize revenue when (or as) each performance obligation is satisfied
Point in time vs. over time
Revenue is recognized over time if any one of these is met: (a) the customer simultaneously receives and consumes the benefit as the entity performs; (b) the entity's performance creates or enhances an asset the customer controls as it's created; or (c) the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. Otherwise, revenue is recognized at the point in time control transfers.
IMPORTANT: "Control" — not "risks and rewards" — is the recognition trigger under ASC 606. Indicators of control transfer include: right to payment, legal title, physical possession, risks/rewards of ownership, and customer acceptance.
Variable consideration
Discounts, rebates, refunds, and performance bonuses are all variable consideration. Include an estimate in the transaction price only to the extent it's probable that a significant reversal won't occur later (the "constraint").
EXAMPLE: A software company licenses a perpetual license (point-in-time, at delivery) bundled with one year of technical support (over-time, recognized ratably over the support period). The total contract price must be allocated between the two performance obligations based on standalone selling prices.
Contract costs
Incremental costs of obtaining a contract (e.g., sales commissions) are capitalized if the entity expects to recover them, and amortized over the period of benefit — unless the amortization period would be one year or less, in which case they can be expensed immediately as a practical expedient.
EXAM TIP: When a question describes a "right of return," remember revenue is recognized only for the amount not expected to be returned, with a separate refund liability recorded for the expected returns.