Revenue Recognition
The accounting principle that determines when and how revenue is recorded, governed by the five-step model under ASC 606.
What is Revenue Recognition?
Revenue recognition is the set of accounting rules that govern when and how a company records revenue from customer contracts. Under ASC 606 (IFRS 15 internationally), revenue is recognized using a five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price to obligations, and recognize revenue when (or as) each obligation is satisfied. The standard replaced a patchwork of industry-specific rules with a unified framework. For simple transactions like retail sales, revenue is recognized at the point of sale. For complex contracts — such as long-term software subscriptions, construction projects, or bundled product-and-service deals — recognition may be spread over time as performance obligations are fulfilled.
Example
A software company sells a bundled package: a perpetual software license ($600 value) and one year of support ($200 value) for a combined price of $800. Under ASC 606, these are two separate performance obligations. The company allocates $600 to the license (recognized immediately upon delivery) and $200 to support (recognized ratably over 12 months at $16.67/month). This treatment prevents the company from booking all $800 upfront and ensures revenue is matched to when obligations are satisfied.
Source: FASB — ASC 606: Revenue from Contracts with Customers