How It Works

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

When can service revenue be recognized?

The revenue recognition principle of ASC 606 requires that revenue is recognized when the delivery of promised goods or services matches the amount expected by the company in exchange for the goods or services.

What are the principles for revenue recognition in GAAP?

GAAP Revenue Recognition Principles. The Financial Accounting Standards Board (FASB) which sets the standards for U.S. GAAP has the following 5 principles for recognizing revenue: Identify the customer contract. Identify the obligations in the customer contract. Determine the transaction price.

When is the new accounting guidance for service contracts effective?

For all other entities with a calendar year end, the new guidance is effective in the year ending December 31, 2019 and interim periods in 2020. The accounting for a service contract under the new guidance may be very different from the accounting for the same contract under ASC 605.

How are service contracts accounted for in accounting?

Contracts for services should be accounted for as long-term contracts, where contract activity falls into different accounting periods, unless they involve the provision of a single service. Where the substance of the contract is that it is performed gradually over time revenue should be recognised as contract activity progresses.

How is warranty accounted for in GAAP accounting?

Warranty Accounting Existing Guidelines Under current GAAP, a warranty is accounted for as a deliverable—a concept similar to a performance obligation— only if it is a “separately priced extended warranty” or a “product maintenance” contract.