Revenue recognition is the process by which a company records revenue in its financial statements when it satisfies its performance obligations under a contract with a customer. In the United States, practice is guided by ASC 606, and internationally by IFRS 15; ASC stands for Accounting Standards Codification, and IFRS stands for International Financial Reporting Standards. The standard uses a five-step model: 1) identify the contract with a customer; 2) identify the performance obligations promised in the contract; 3) determine the transaction price; 4) allocate the price to the performance obligations; and 5) recognize revenue when or as the entity satisfies each obligation. Revenue may be recognized at a point in time (e.g., when control passes) or over time (e.g., as services are performed). The timing and amount can involve estimates for variable consideration and expect modifications to contracts. The approach affects reported top-line revenue, gross margin, and related ratios, and it requires disclosures about judgments and estimates. Common applications include software subscriptions, manufacturing delivery, and professional services, where revenue recognition follows the transfer of control or the completion of performance obligations.
A software company recognizes revenue as customers gain access to a cloud service over a one-year subscription period.
GAAP · ASC 606 · IFRS 15 · Deferred revenue · Performance obligations · Contract with customer · Transaction price