Under ASC 606, what are the five steps to recognize revenue?

• A. Identify contract, identify performance obligations, determine transaction price, allocate price to performance obligations, recognize revenue when or as the entity fulfills each obligation.
• B. Recognize revenue when cash is received.
• C. Identify performance obligations and allocate margins, irrespective of timing.
• D. Determine total contract value and recognize revenue on signing.

Answer: (A)

ASC 606 recognizes revenue by a five-step process that ties when revenue is recorded to the transfer of control of promised goods or services. First, identify the contract with a customer. Then determine the performance obligations—the distinct promises to transfer goods or services. Next, determine the transaction price. After that, allocate that price to the identified performance obligations. Finally, recognize revenue when the entity satisfies each performance obligation, which can occur over time or at a point in time depending on when control is transferred.

This sequence is why the option that lists these five steps in order is the best answer. It reflects the right approach: revenue follows the transfer of control rather than cash collection, signing a contract, or focusing on margins alone. For example, a software subscription would involve identifying the contract, separating the license and ongoing support as separate obligations, determining the price, allocating it between those obligations, and recognizing revenue over the period the customer receives access and benefits.