Revenue Recognition

Five steps (Accounting Standards Codification (ASC) 606)

1. Contract — collection must be probable.
2. Performance obligations — distinct: capable of being distinct and separately identifiable.
3. Transaction price — variable consideration (expected value or most likely amount) + constraint; financing component (ignore if ≤ 1 year).
4. Allocate — relative standalone selling prices.
5. Recognize — when control transfers.

Over time if any one

• Customer receives and consumes as performed.
• Customer controls the asset as it's created or enhanced.
• No alternative use + enforceable right to payment to date.

Balances

• Receivable: unconditional (only time). Contract asset: conditional. Contract liability: paid in advance.
• Sales commissions: capitalize (expense if ≤ 1 year).

Exam traps

• Assurance warranty = cost accrual; service warranty = separate obligation.
• Principal = gross; agent = net.
• Functional license = point in time; symbolic = over time.
• Returns: refund liability + return asset at cost.
• Consignment: no revenue on shipment to consignee.