What is revenue recognition?
Revenue recognition is an accounting principle that specifies how and when revenue is recognized. Because there are many possible points at which revenue can be recognized, analysts typically prefer that companies recognize revenue in a way that is consistent with industry standards to facilitate comparison of financial statements across companies. A company’s revenue recognition standard should also be consistent over time to make it easier to analyze trends in data, garner key takeaways to inform KPIs, and identify inconsistencies.
What is the updated revenue recognition principle?
Accounting Standards Codification (ASC) 606 was created in 2014 by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). This industry-neutral revenue recognition framework provides guidance to any business, public or private, that enters into contracts with customers to exchange goods or services. This updated set of standards makes it easier to compare financial statements of different businesses across industries.
There are five conditions businesses must meet to comply with the ASC 606 standard. First, they must identify the contract with the customer. Second, they must identify the contract’s performance obligations. Third, they must determine the transaction price of the exchanged goods or services. Fourth, they must allocate the transaction price of the exchanged goods or services. Fifth, once each performance obligation is met, revenue should be recognized.