ASC 606 is the FASB accounting standard that governs when and how to recognize revenue — using a five-step model: identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, and recognize revenue when each obligation is satisfied. It replaced prior industry-specific revenue rules and significantly affects SaaS, construction, and multi-element contracts.
ASC 606 (Revenue from Contracts with Customers) was issued jointly by FASB and IASB in 2014 and became effective for public companies in 2018 and private companies in 2019. It replaced over 200 pieces of industry-specific US GAAP revenue guidance with a single, principle-based framework. The five-step model: (1) Identify the contract with a customer — must be approved, have commercial substance, rights and payment terms must be identifiable, and collection must be probable. (2) Identify the performance obligations — distinct goods or services the entity promises to transfer. 'Distinct' means: capable of being distinct (customer can benefit from it on its own or with other resources) AND separately identifiable in the context of the contract. (3) Determine the transaction price — total consideration including variable consideration (discounts, refunds, incentives), significant financing components, and non-cash consideration. Variable consideration is included to the extent it is 'probable' not to result in a significant revenue reversal. (4) Allocate the transaction price to performance obligations — typically based on standalone selling prices of each obligation. (5) Recognize revenue when (or as) each performance obligation is satisfied — either at a point in time (product delivery) or over time (services rendered, construction progress). ASC 606 changed practice significantly for: SaaS companies (separating software licenses from implementation and support; subscription vs. perpetual license treatment); construction contractors (percentage-of-completion accounting now required for certain contracts, prohibited for others); multi-element arrangements (bundled products and services must be separated and allocated). For loan underwriting, lenders review income statement revenue figures. A business that adopted ASC 606 may show different revenue timing than under prior rules. Understanding whether reported revenue is comparable across periods is important for businesses seeking financing.
ASC 606 is a US GAAP standard that applies to entities that follow GAAP — primarily businesses preparing audited or reviewed financial statements for banks, investors, or regulatory purposes. Many small businesses use cash-basis or simplified accrual accounting rather than full GAAP. If your bank requests GAAP-basis financial statements for a loan, ASC 606 applies. If you're a cash-basis taxpayer preparing only tax returns, ASC 606 does not govern your books. Private companies that adopted GAAP under ASC 606 typically had effective dates for fiscal years beginning after December 15, 2018.
For businesses with deferred revenue (upfront payments for future service delivery), ASC 606 moves revenue recognition later than cash receipt. This means your income statement may show lower revenue than your bank statements, creating confusion for lenders. Businesses with significant deferred revenue should provide supplemental schedules explaining the reconciliation between cash collected and revenue recognized. Additionally, percentage-of-completion contractors should be prepared to explain how revenue is calculated — lenders may not be familiar with the method.
ASC 606 (US GAAP) and IFRS 15 (International Financial Reporting Standards) were issued jointly and are substantially converged — the five-step model is identical. Minor differences exist in implementation guidance, transition options, and certain industry-specific issues. For US businesses, ASC 606 governs. For international operations or subsidiaries of foreign parents using IFRS, IFRS 15 governs. The convergence means that multi-national financial statements prepared under either standard are broadly comparable for the revenue recognition framework.