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Overview of ASC 606

ASC 606 Revenue from Contracts with Customers was developed jointly by the FASB and IASB.

Austen Harris
Chris Draney
Published:
Jun 4, 2016
Updated:
Oct 10, 2026

Revenue is one of the core elements of an entity’s financial statements; it is used as the basis of many financial measures to compare companies to one another and to analyze a single company over time. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) recognized that existing revenue recognition literature differed between their jurisdictions and that both systems needed improvements. The two organizations collaborated, and Accounting Standards Update (ASU) 2014-09 was produced as the result of their joint efforts. This update is part of the Accounting Standards Codification (ASC) as Topic 606: Revenue from Contracts with Customers and supersedes the existing revenue recognition literature in Topic 605. The goals of ASU 2014-09 are as follows:

  • Remove inconsistencies and weaknesses in revenue requirements
  • Provide a more robust framework for addressing revenue issues
  • Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
  • Provide more useful information to users of financial statements through improved disclosure requirements
  • Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer
    (ASU 2014-09 Summary)

These goals are achieved through a five-step approach that standard setters designed to help entities recognize revenue in a way that better reflects the consideration that the entity expects to receive in return for the transferred goods or services.

This article provides a basic overview of ASC 606 and illustrates application of ASC 606 in practice when applying the standard. The RevenueHub site publishes other articles that (1) summarize the major issues of each of the five steps, (2) provide a detailed analysis of some of the nuances of ASC 606, and (3) show proper implementation of ASC 606 through relevant case studies.

Scope

ASC 606 applies to contracts with customers in all industries except for those excluded in ASC 606-10-15-2:

  • Leases (ASC 840)
  • Insurance contracts (ASC 944)
  • Contractual obligations within certain financial instrument guidance
    • Receivables (ASC 310)
    • Investments (ASC 320, 323, 325)
    • Liabilities (ASC 405)
    • Debt (ASC 470)
    • Derivatives and Hedging (ASC 815)
    • Financial Instruments (ASC 825)
    • Transfers and Servicing (ASC 860)
  • Guarantees other than product or service warranties (ASC 460)
  • Nonmonetary exchanges between entities within the same line of business used to facilitate sales to customers
  • Not-for-profit entities (ASC 958)

When an entity enters into a transaction that is subject to guidance from multiple topics in the codification (like the topics listed above), the entity must exclude from the transaction price the amount of consideration tied to revenue subject to the other topic(s). The remaining consideration is allocated to the other performance obligations according to guidance in ASC 606 (ASC 606-10-15-4). For more information, please refer to Scope and Interaction with Other Guidance.

The Five-Step Approach

ASC 606 directs entities to recognize revenue when the promised goods or services are transferred to the customer. The amount of revenue recognized should equal the total consideration an entity expects to receive in return for the goods or services. The FASB and the IASB (the Boards) created a five-step approach that entities should apply when determining the amount and timing of revenue recognition.

  • Step 1: Identify the contract with a customer
  • Step 2: Identify the performance obligations in the contract
  • Step 3: Determine the transaction price
  • Step 4: Allocate the transaction price to the performance obligations in the contract
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

The following video from BYU Professor Melissa Lewis Western gives a brief overview of these steps. 

These steps are addressed more fully in The Five-Step Method.

Conclusion

ASC 606 supersedes most existing industry- and transaction-specific guidance. Its purpose is to improve the revenue recognition portion of financial statements and increase the consistency of financial reporting globally. Standard setters hope to achieve this with a five-step approach to recognizing revenue from contracts.

As of now, all entities have completed the adoption of ASC 606, and it is in steady-state application.

Editor’s Note

This article was originally written on June 4, 2016, during the period when ASC 606 was being finalized, and early adoption guidance was emerging. It has since been updated to reflect current accounting guidelines, steady-state application of ASC 606, and ongoing best practices. References to adoption, transition, and early implementation have been revised or rephrased to indicate that ASC 606 is now fully adopted by all applicable entities.

Resources Consulted

Footnotes
Austen Harris
Chris Draney
Jun 4, 2016