4.1 Overview

For contracts within the scope of ASC 606, the first step of the revenue standard is to determine whether a contract exists, for accounting purposes, between an entity and its customer. The criteria that need to be in place to establish that a contract exists are intended to demonstrate that there is a valid and genuine transaction between an entity and its customer and that the parties to the contract have enforceable rights and obligations that will have true economic consequences. If, at contract inception, the criteria in ASC 606-10-25-1 are met, the contract would be accounted for under the remaining provisions of the standard. Because the rest of the provisions of the standard rely on a careful analysis of the enforceable rights and obligations under the contract, if any of the five criteria required to establish a contract for accounting purposes are not met, the rest of the revenue recognition model cannot be applied. In these circumstances, any consideration received from the customer would be recognized as a liability (see Section 4.6), and revenue can only be recognized once (1) the contract existence criteria are met (under the assumption that the rest of the revenue recognition model supports the recognition of revenue) or (2) the consideration received is nonrefundable and one or more of the following have occurred:

• All of the performance obligations in the contract have been satisfied and substantially all of the promised consideration has been received.
• The contract has been terminated or canceled.
• The entity has transferred control of the goods or services to which the consideration received is related and has stopped transferring (and has no obligation to transfer) additional goods or services to the customer.