Accounting Standards Codification (ASC) 606-10 is a subtopic within ASC 606, a standard issued by the Financial Accounting Standards Board (FASB) that tells companies how to report their earnings from customer contracts. ASC 606 is part of the Generally Accepted Accounting Principles (GAAP) in the United States. The goal of ASC 606-10 is to ensure that companies report their earnings in a clear, consistent way, regardless of industry or market.

The main principle of ASC 606-10 is that businesses should record revenue only when their customers receive the goods or services for which they paid. To do so, businesses should follow five simple steps: define the customer contract details, break down what the contract promises to the customer, decide on the price, divide the price based on the promises, and record the revenue as the company fulfils those promises. This method provides a more accurate financial picture based on business activities.

Below, we’ll explain the revenue recognition principles under ASC 606-10, how this accounting standard compares to others, and common challenges in implementing ASC 606-10.

What’s in this article?

• What changed with ASC 606-10
  
• Revenue recognition principles under ASC 606-10
  
• ASC 606-10 vs. IFRS 15
  
• ASC 606-10 vs. FRS 102
  
• Common challenges in implementing ASC 606-10
  

What changed with ASC 606-10

ASC 606-10, issued in 2014 as part of Topic 606, introduced several key changes and differences from the previous revenue recognition guidance under ASC 605. Under ASC 606-10, companies must use higher levels of judgment and estimation. They must actively evaluate each contract and make decisions on factors such as revenue timing, price allocation, and management of complex contract terms. ASC 606-10 also demands more disclosures, so companies must be more transparent about how they apply these principles, the assumptions they make, and any changes that could impact revenue recognition.

Here are the notable new aspects and differences with ASC 606-10:

• Five-step revenue recognition model: ASC 606-10 introduces a uniform, five-step model for recognising revenue. This differs from the industry- and transaction-specific rules of ASC 605. The model requires entities to identify contracts, performance obligations, and transaction prices more rigorously and provides a more standardised framework across all sectors.

• Greater focus on performance obligations: Unlike the previous guidance, ASC 606-10 emphasises identifying distinct performance obligations within a contract and recognising revenue based on the transfer of control rather than the risks and rewards of ownership. This shift requires entities to carefully evaluate each promised good or service and determine how and when the customer obtains control. This often results in different timing and patterns of revenue recognition.

• Increased disclosure requirements: ASC 606-10 requires more detailed disclosures about revenue recognition. These disclosures include qualitative and quantitative information on customer contracts, significant judgments, and changes in contract balances. This provides greater transparency for stakeholders on the entity’s revenue-generating activities and their financial impacts.

• Variable considerations and constraint guidance: ASC 606-10 requires companies to estimate variable considerations (such as bonuses and discounts) and recognise revenue only to the extent it is “probable” that a major reversal will not occur. This is a departure from the previous standard, under which companies often waited until contingencies were resolved.

Revenue recognition principles under ASC 606-10

ASC 606-10 brings a more principles-based approach to revenue recognition for customer contracts. It’s built on a five-step model that provides consistency across different industries and helps companies better reflect the transfer of goods or services. Here’s a closer look at these five steps.

Step 1: Identify the contract with a customer

A contract is any agreement between two or more parties that establishes rights and obligations. Under ASC 606-10, all parties must approve the contract, clarify within it what each side is giving and receiving, specify payment terms, and include commercial substance. Most importantly, it should be probable that the company will collect what it’s owed. If you negotiated multiple contracts together with the same customer, you might need to bundle these into one for accounting purposes.

Step 2: Pinpoint performance obligations

Performance obligations are the promises you make to your customer about what goods or services they’ll get. ASC 606-10 requires you to break down these promises and decide which ones are distinct enough to stand on their own. What makes a promise distinct is whether the customer can benefit from it on its own (or with other resources they already have) and whether it’s clearly separate from other items in the contract.

Step 3: Calculate the transaction price

The transaction price is what the company expects to receive in exchange for delivering its goods or services. To calculate this price, consider the following.

Variable considerations

If the price isn’t permanent (think bonuses or penalties), companies must estimate it based on either an “expected value” or “most likely amount” and ensure they recognise only revenue that won’t need to be reversed later.

Significant financing components

If there’s a large gap of time between when you get paid and when you deliver the goods or services, you might need to adjust for the time value of money, as money received earlier carries more value than the same amount received at a later date.

Non-cash considerations

Sometimes, customers pay in goods or services, rather than cash. You should value these at the fair value (i.e., a price knowledgeable parties would agree to under current market conditions).

Consideration payable to a customer

Anything given back to the customer, such as rebates and credits, usually reduces the transaction price.

Step 4: Allocate the transaction price to performance obligations

Once you’ve settled on the transaction price, you need to allocate it across the different performance obligations. You do so based on their relative stand-alone selling prices. If these prices aren’t directly available, you’ll have to estimate them using methods such as market assessments, a cost-plus-margin approach, and sometimes a residual approach. This allocation is key, because it determines how much revenue is recognised for each obligation.

Step 5: Recognise revenue when or as performance obligations are satisfied

Recognise revenue as you deliver on your contract promises. This can happen either over time or at a specific point in time. Recognise revenue over time if these criteria apply:

• The customer benefits as you perform (as with a subscription service).

• The customer controls what you’re creating or enhancing (as with a construction project on the customer’s land).

• You’re creating something that has no alternative use to you and you have a right to payment for work done to date.

If none of them apply, recognise revenue at a specific point in time, often when the customer gets control of the good or service. Signs of this transfer could include if the customer has the legal title, physical possession, the risks and rewards of ownership, or simply if they accept the product.

ASC 606-10 vs. IFRS 15

Both ASC 606-10 and International Financial Reporting Standard (IFRS) 15 set the rules for how companies should recognise revenue from customer contracts. They were issued together in 2014 to make US and international standards more similar. While they have a lot in common, there are some key differences that can affect how companies apply them in practice.

Similarities

• Both ASC 606-10 and IFRS 15 follow the same five-step process for recognising revenue:

  • Identify the contract with a customer.
    
  • Pinpoint the performance obligations in the contract.
    
  • Determine the transaction price.
    
  • Allocate that price to the performance obligations.
    
  • Recognise revenue when you’ve delivered on those obligations.
    

• Both standards have similar criteria for when revenue can be recognised: when performance obligations have been met and when the customer gains control of what businesses have sold them.

• They both require companies to estimate variable considerations such as discounts and bonuses up front and recognise revenue only if it’s highly probable that there won’t be a reversal later.

• Both standards demand more detailed disclosures including how businesses handle revenue recognition, what judgments they make, and any changes in contract-related balances.

Differences

While similar, ASC 606-10 (and the broader US GAAP rules) and IFRS 15 aren’t identical. Here are the key ways they differ.

ASC 606-10

• Contract recognition: To recognise a contract under ASC 606-10, it has to be “probable” that you’ll collect the payment you expect. In US GAAP terms, “probable” generally means a likelihood of 75% or more.

• Contract costs: ASC has more specific rules for when you can capitalise costs to obtain or fulfil a contract (such as a sales commission). It also offers a shortcut that allows you to write off these costs right away if the benefit period is one year or less.

• Impairment testing for capitalised costs: ASC 606-10 follows a two-step process of performing a recoverability test and then calculating the impairment loss.

• Guidance on licensing: ASC rules can be more specific when it comes to licences, especially in deciding whether a licence gives a right to access something over time or a right to use something at a point in time.

• Interim reporting differences: The US has different reporting requirements for what needs to be disclosed in interim financial statements. You must allocate among those periods certain costs that benefit more than one interim.

IFRS 15

• Contract recognition: To recognise a contract under IFRS 15, it must be “probable” that you’ll collect the payment you expect. IFRS defines “probable” as “more likely than not” or over 50%. This subtle difference can sometimes lead to earlier recognition of revenue under IFRS 15.

• Contract costs: IFRS also requires you to capitalise costs to obtain or fulfil a contract, but it doesn’t have the same specific shortcut for short-term contracts as ASC 606-10 does. This can create slight differences in how costs are reported.

• Impairment testing for capitalised costs: IFRS calculates impairment loss if there are indicators of impairment.

• Guidance on licensing: IFRS enables more judgment in deciding how to treat licences. This can result in different timing for recognising revenue, particularly in industries such as tech, media, and pharmaceuticals.

• Interim reporting differences: IFRS requires less detail in interim reports and focuses more on what’s necessary for understanding changes since the last annual report. You cannot defer a cost that isn’t considered an asset at the end of an interim period.

ASC 606-10 vs. FRS 102

ASC 606-10 and Financial Reporting Standard (FRS) 102 both set ground rules for how companies should recognise revenue, but they employ different models and methods. ASC 606-10 follows a new, more comprehensive model under the US GAAP that unifies revenue recognition across industries, while FRS 102 follows a more traditional accounting process under the UK GAAP. ASC 606-10 is more detail oriented and focuses on control, but requires more work and judgment from the businesses that use it. FRS 102 is simpler to use and focuses on risks and rewards, but doesn’t always capture the full picture, especially with more complicated contracts.

Upcoming changes that go into effect in 2026 will align FRS 102 more with ASC 606-10. For now, here’s a closer look at how these two standards differ.

ASC 606-10

• Revenue recognition: ASC 606-10 uses a five-step model that focuses on the transfer of control. It emphasises identifying contracts and performance obligations, setting transaction prices, allocating those prices, and recognizing revenue either over time or at a point in time.

• Recognition criteria and timing: The timing of revenue recognition depends on when control of goods or services passes to the customer. The model is highly flexible and enables companies to customise their revenue recognition for each contract.

• Handling complex contracts: When handling contracts that have multiple promises (such as a bundle of products and services), ASC 606-10 requires businesses to split these into separate performance obligations and allocate the transaction price accordingly. This ensures revenue is matched more precisely to the delivery of goods or services.

• Variable considerations: ASC 606-10 explains how to handle variable considerations such as discounts, rebates, and bonuses. Companies must estimate these amounts and can only recognise them when it’s highly probable there won’t be a big reversal. This necessitates careful assessment to avoid overstating revenue.

• Capitalising costs: ASC 606-10 requires businesses to capitalise certain costs related to obtaining and fulfilling contracts (e.g., sales commissions) if they’re expected to be recovered. There’s also guidance on paying these costs over the period they benefit, which makes accounting more difficult.

• Disclosures: Companies must provide detailed notes about their contracts, performance obligations, and the significant judgments involved in recognising revenue. This clarifies for investors and other users of financial statements how a company earns its revenue and what risks are involved.

FRS 102

• Revenue recognition: FRS 102 simplifies revenue recognition and relies more on rules. It focuses on the transfer of risks and rewards rather than control and generally enables more straightforward, less nuanced application, which can be easier but less precise.

• Recognition criteria and timing: Under FRS 102, companies recognise revenue when they transfer the risks and rewards of ownership. This makes it more predictable and consistent but potentially less aligned with the economic reality of some transactions. The upcoming changes will introduce a requirement for recognising revenue as performance obligations are met.

• Handling complex contracts: FRS 102 doesn’t require companies to break down contracts into separate performance obligations or to separate out every promise. Instead, they recognise revenue based on when risks and rewards transfer. This can simplify the process but won’t always reflect the nuances of more complicated deals.

• Variable considerations: While FRS 102 does address variable considerations, it doesn’t have the same rigorous requirements as ASC 606-10 does. Businesses should recognise revenue when it’s reasonably assured and measurable, without the same level of constraint and estimation as with ASC 606-10.

• Capitalizing costs: Under FRS 102, companies typically write off contract costs as incurred.

• Disclosures: While there are disclosure requirements under FRS 102, they aren’t as extensive or detailed as those under ASC 606-10. Instead, they focus more on providing enough information to understand the financial statements rather than exploring revenue recognition policies and judgments.

Common challenges in implementing ASC 606-10

ASC 606-10 creates several new challenges. It requires companies to exercise more judgment than with earlier versions of ASC 606: companies must evaluate performance obligations, estimate variable considerations, and set the timing of revenue recognition based on control transfer rather than on more straightforward, industry-specific rules.

With the shift to a more principles-based standard, businesses have faced hurdles that require deeper judgment, new processes, and more rigorous accounting practices. Here’s a closer look at those hurdles.

Performance obligations

Under ASC 606-10, businesses must thoroughly analyse what has been promised to the customer to identify distinct performance obligations. This can be particularly challenging for contracts that include multiple goods and services.

Variable considerations

ASC 606-10 requires businesses to estimate amounts such as discounts, rebates, and performance bonuses at the start and apply a constraint to ensure that revenue is recognised only to the extent it is not likely to be reversed.

Revenue recognition timing

Under ASC 606-10, businesses must choose whether to recognise revenue over time or at a point in time. This depends on when the customer gains control of the goods or services and requires careful evaluation of contract terms and the nature of the performance obligations.

Transaction prices

Under ASC 606-10, businesses must allocate the transaction price to multiple performance obligations based on their stand-alone selling prices. This can be particularly challenging when those prices aren’t easily observable.

Systems and processes

Many businesses must upgrade their accounting systems and processes to capture the data and make the estimates and allocations that ASC 606-10 necessitates.

Disclosure requirements

ASC 606-10 requires more extensive disclosures regarding revenue recognition policies, judgments, and changes in contract balances. These disclosures are meant to help anyone reading a financial statement better understand a company’s revenue streams and the judgments applied.

Cross-departmental collaboration

Implementing ASC 606-10 requires cross-departmental coordination. Businesses must involve sales, legal, IT, and operations teams to ensure all aspects of contract management align with the new requirements.