On the Radar
Revenue Recognition
The core principle of the revenue
standard is to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which an entity expects to be entitled in
exchange for those goods and services. Significant judgments frequently need to be
made when an entity evaluates the appropriate recognition of revenue from contracts
with customers. These judgments are often required throughout the revenue standard’s
five-step process that an entity applies to determine when, and how much, revenue
should be recognized.
Application of the five steps illustrated above requires a critical
assessment of the specific facts and circumstances of an entity’s arrangement with
its customer. Some of the more challenging and judgmental aspects of applying the
revenue standard are highlighted below.
Entities often have
difficulty determining the appropriate judgments to
apply in the identification of performance obligations
and the assessment of whether an entity is a principal
or an agent, as described below. Not surprisingly, these
are two topics of the revenue standard on which entities
commonly seek the SEC staff’s views in prefiling
submissions. In addition, these topics are frequently
discussed in SEC staff speeches at the annual AICPA
& CIMA Conference on Current SEC and PCAOB
Developments.
Identifying Performance Obligations
A performance obligation is the unit of account for which revenue is recognized,
and the identification of performance obligations affects the revenue
recognition timing. A performance obligation is a promise that an entity makes
to transfer to its customer a “distinct” good or service. Contracts with
customers often include multiple promises, and it can be difficult for an entity
to (1) identify the activities it is undertaking that qualify as promises to
provide goods or services and (2) determine which promises are distinct. An
entity should answer two questions to evaluate whether a promised good or
service is distinct and, thus, a separate performance obligation:
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Can the customer benefit from the good or service on its own or with other readily available resources (i.e., is the good or service capable of being distinct)?
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Is the entity’s promise to transfer the good or service separately identifiable from other promises in the contract (i.e., is the good or service distinct within the context of the contract)?
Only when the answer to each question above is yes for a promised good or service
(or bundle of goods or services) is the promised good or service (or bundle of
goods or services) distinct and, therefore, a performance obligation. If the two
revenue recognition criteria for identifying a distinct good or service are not
met, an entity must combine goods or services until it identifies a bundle that
is distinct.
Answering the first question can be straightforward but is not always so. If an
entity typically sells a good or service on its own, or if the good or service
can be used with another good or service that the entity (or another vendor)
sells separately, the answer to the first question is likely to be yes. The key
is whether a customer can generate some economic benefits from the good or
service on its own or with other readily available resources.
Answering the second question is
often more challenging. For an entity to assess whether its promise to transfer
a good or service is separately identifiable from other goods or services in a
contract, the entity should evaluate whether the nature of the promise is to
transfer each of those goods or services individually or, instead, to transfer a
combined item or items to which the promised goods or services are inputs.
Broadly speaking, if multiple promised goods or services represent inputs to a
combined output, the combined output would typically be greater than (or
substantively different from) the sum of those inputs.
Assessing Whether an Entity Is a Principal or an Agent
It is not uncommon for more than one party to be involved in providing goods or
services to a customer. Whenever another party is involved, an entity must
evaluate whether its promise is to provide the goods or services itself as a
principal or to arrange for another party to provide the goods or services to a
customer. Such a determination significantly affects the amount of revenue an
entity records. This is because a principal records as revenue the gross amount
of consideration from the customer (with a corresponding cost for the amount
paid to the other party involved in providing goods or services to the customer)
while an agent records the net amount retained from the transaction.
The unit of account for
performing the principal-versus-agent assessment is called the “specified” good
or service, which is the good or service that an entity determines to be
distinct by using the same criteria that apply to the identification of
performance obligations. The underlying principle in determining whether an
entity is a principal or an agent is to evaluate whether the entity controls the
specified good or service (i.e., an asset) before transferring it to the
customer. ASC 606-10-25-25 states, in part, that “[c]ontrol of an asset refers
to the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset.” Determining whether the entity controls the
specified good or service before transferring it to the customer — and,
therefore, is the principal in the arrangement — may be clear in some
circumstances but may require significant judgment in others.
These indicators are intended to support a conclusion that the entity does or
does not control the specified good or service before transferring it to the
customer and should not be used as a checklist that overrides the underlying
principle of control.
The framework for evaluating whether an entity is a principal or an agent is also
relevant to the determination of the party to which control of a specified good
or service is transferred (i.e., which party is the entity’s customer). This
evaluation is particularly relevant when an intermediary (e.g., a distributor or
reseller) is involved in reselling the entity’s goods or services to an end
customer. If an entity determines that control of a specified good or service is
transferred to an intermediary, the intermediary is the entity’s customer, and
the entity records revenue based on the amount that it expects the intermediary
to pay. However, if the entity concludes that the intermediary does not obtain
control of the specified good or service before the good or service is
transferred to the end customer, the amount of revenue that the entity records
is based on the consideration (if known) that the entity expects the end
customer to pay.
Variable Consideration
Many revenue contracts include variable consideration, including
price concessions, rebates, incentives, royalties, and performance-based bonuses
or penalties. Generally, the revenue standard requires an entity to estimate
variable consideration, with recognition subject to a constraint such that it is
probable that a significant reversal of cumulative revenue recognized will not
occur. There are a few exceptions to the requirement to estimate variable
consideration, including sales- or usage-based royalties associated with a
license of intellectual property (IP) that is the predominant item. In addition,
entities must carefully evaluate whether variable consideration should be
allocated to one or more, but not all, performance obligations in a contract (or
one or more, but not all, distinct goods or services that are part of a series
of distinct goods or services that represent a single performance obligation).
For example, some usage-based fees may be allocated to a distinct day of service
that is part of a series of services.
Consideration Payable to a Customer
From time to time, an entity may provide a cash payment or incentive
to a customer, a customer’s customer, or another party in the distribution chain. An
entity must carefully evaluate whether a payment or incentive provided to a
customer’s customer should be accounted for in accordance with the guidance in ASC
606 on consideration payable to a customer. For example, when an entity, such as an
entity operating an online marketplace, arranges for goods or services to be
provided by a vendor to a consumer, it may be difficult for the entity to determine
whether it should apply the guidance on consideration payable to a customer to a
payment or incentive provided to the consumer (i.e., the end customer) since both
the vendor and the consumer could be viewed as customers of the entity.
Further, an entity should consider whether a payment or incentive provided to a
customer or a customer’s customer is in exchange for a good or service that is
distinct from the goods or services provided to the customer.
Licensing
The revenue standard includes specific guidance on the licensing of an entity’s
IP. For example, revenue associated with the license of functional IP (e.g.,
software, film, music, drug compound/formula) is typically recognized at a point
in time (unless combined as a single performance obligation with a service that
is recognized over time) while revenue associated with a license of symbolic IP
(e.g., franchise, trade or brand name, logo) is typically recognized over time.
Accordingly, entities may need to apply different revenue recognition methods
for different types of licenses. However, the general framework used to account
for licensing of IP is essentially the same as the framework used to account for
the sale of other goods or services (i.e., the five-step model described above).
As noted above, one exception to the general framework is the accounting for
sales- or usage-based royalties associated with licensing of IP that is the
predominant item.
Licensing of IP can take many forms, and the economics and substance of such
transactions can often be difficult to identify. This is because (1) a license
is defined by the contractual rights conveyed to a customer and (2) the
accounting for such rights is highly dependent on how those rights are defined
and what, if any, additional promised goods or services are required to be
provided along with such rights. Therefore, an entity may find that no two
contracts are the same and that new judgments must be made with each
arrangement. As more and more entities expand their product offerings to include
technology-related products or services, assessing the appropriate revenue
recognition for licensing of IP continues to be a topic of focus for many
entities.
Financial Statement Disclosures
The revenue standard requires entities to disclose both
quantitative and qualitative information that enables users of financial
statements to understand the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers.
The illustration below gives an overview of the annual revenue disclosure
requirements for public entities. Nonpublic entities can elect not to provide
certain disclosures, and the disclosure requirements for interim periods are
significantly reduced in scope from the illustration below.
Annual Disclosures
SEC Comment Letters
Revenue remains a hot topic of
SEC comment letters. Key themes of SEC comment letters related to revenue
recognition include the following:
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Theme
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Example(s)
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Significant judgments
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Disclosures of performance obligations
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Contract costs
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Disclosures of disaggregation of revenue
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Disclosures of contract balances
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How contract balances are derived.
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Disclosures of remaining performance obligations
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When an entity expects to recognize
revenue.
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The SEC also
continues to focus on non-GAAP metrics, including
adjustments that change the accounting policy or the
method of recognition of an accounting measure that
may be misleading and, therefore, impermissible. For
example, a non-GAAP performance measure that
reflects revenue recognized over the service period
under GAAP on an accelerated basis as if the
registrant earned revenue when it billed its
customers is likely to be prohibited because it is
an individually tailored accounting principle and
does not reflect the registrant’s required GAAP
recognition method. However, in certain
circumstances, the SEC may not object when a
registrant presents the amount of revenue billed to
a customer — that is, “billings” or “bookings” (with
appropriate characterization) as an operational
metric — because such measures are not considered
non-GAAP measures. For more information, see
Deloitte’s Roadmap Non-GAAP Financial Measures and
Metrics.
Accounting Standards Update on Share-Based Consideration Payable to a Customer
In May 2025, the FASB issued ASU
2025-04, which clarifies the guidance in both ASC 606 and ASC
718 on the accounting for share-based payment awards that are granted by an entity
as consideration payable to its customer. The ASU is intended to reduce diversity in
practice and improve existing guidance, primarily by revising the definition of a
“performance condition” and eliminating a forfeiture policy election for service
conditions associated with share-based consideration payable to a customer. In
addition, the ASU clarifies that the guidance in ASC 606 on the variable
consideration constraint does not apply to share-based consideration payable to a
customer “regardless of whether an award’s grant date has occurred” (as determined
under ASC 718). For more information, see Deloitte’s May 16, 2025, Heads Up.
Accounting Standards Update on Derivative Scope Refinements and Share-Based Consideration From a Customer
In September 2025, the FASB issued ASU 2025-07, which
refines the scope of the guidance on derivatives in ASC 815 and clarifies the
guidance on share-based payments from a customer in ASC 606. The ASU is intended
to address concerns about the application of derivative accounting to contracts
that have features based on the operations or activities of one of the parties
to the contract and to reduce diversity in the accounting for share-based
payments in revenue contracts. The ASU also clarifies that when an entity has a
right to receive a share-based payment from its customer in exchange for the
transfer of goods or services, the share-based payment should be accounted for
as noncash consideration within the scope of ASC 606. That is, an entity’s right
to a share based payment from a customer that is in exchange for goods or
services would not be within the scope of ASC 815 or ASC 321 unless and until
the entity’s right to receive or retain the share based payment is not
contingent on the entity’s satisfaction of a performance obligation. Further,
the ASU clarifies that (1) the estimated fair value of a share-based payment at
contract inception should be included in the transaction price; (2) any changes
in the fair value, as determined under other Codification topics, should not be
accounted for until the right to consideration is unconditional; and (3) any
changes due to the form of the consideration should not be included in the
transaction price and recognized as revenue (or a reduction of revenue). For
more information, see Deloitte’s September 29, 2025, Heads Up.
Postimplementation Review
After the FASB issues a major new accounting standard, it
performs a postimplementation review (PIR) process to evaluate whether the
standard is achieving its objective by providing users of financial statements
with relevant information that justifies the costs of providing it. This process
enables the Board to solicit and consider stakeholder input and FASB staff
research. At its July 28, 2021, and September 21, 2022, meetings, the FASB
discussed feedback received to date on the revenue standard as well as the
results of research performed on certain revenue topics, including disclosures,
short-cycle manufacturing, principal-versus-agent considerations, licensing, and
variable consideration. In the handouts prepared for the Board’s July 2021 and September 2022 meetings, the FASB staff
noted that stakeholder feedback on the revenue standard was positive overall,
particularly from users of financial statements since the standard results in
more useful and transparent information, improved disclosures, and comparability
across entities and industries. The staff further observed that while many
preparers noted significant one-time costs associated with implementation of the
standard, they also highlighted that the standard has been beneficial in the
long run.
On November 10, 2023, the FASB hosted a public roundtable on the PIR of ASC 606. During this
meeting, participants discussed the benefits and costs of the revenue standard,
implementation challenges, improvements to the standard-setting process, and
assessment of the PIR process.
The PIR of ASC 606 was further discussed at the FASB’s May 8,
2024, meeting, whose agenda was facilitated by a handout prepared by the FASB staff in
advance. At the meeting, the FASB staff updated Board members and other
participants on feedback received from stakeholders about benefits, costs, and
implementation challenges associated with the adoption of the revenue standard.
In addition to giving an overview of topics discussed at prior meetings, the
staff observed that stakeholders appreciated the revenue standard’s (1)
elimination of industry-specific guidance, (2) provision of comprehensive
principles-based guidance, and (3) convergence with IFRS® Accounting
Standards. However, the staff acknowledged stakeholders’ observation that in
addition to the one-time implementation costs, application of the revenue
standard has resulted in higher ongoing costs, primarily because ASC 606
requires entities to exercise greater judgment than they did when applying
legacy revenue guidance. Also at the meeting, Board members discussed the
revenue standard’s impacts on comparability, including challenges faced by
specific industries upon the elimination of industry specific guidance. The
staff observed that stakeholders generally agreed that the benefits of
eliminating this guidance have outweighed the costs of doing so. In addition,
the following implementation challenges were discussed:
- Licensing.
- Identification of performance obligations.
- Stand-alone selling price.
- Constraint on variable consideration.
- Sales-based or usage-based royalties.
- Principal-versus-agent considerations.
- Consideration payable to a customer.
- Incremental costs of obtaining a contract.
- Short-cycle manufacturing.
- Disclosures.
- Accounting for loss contracts (also referred to as onerous contracts).
- The interaction between ASC 606 and ASC 815 in the accounting by a seller (grantee) for warrants granted by a customer when those warrants vest upon the seller’s satisfaction of the performance obligation.
At the FASB’s October 2, 2024, meeting, the Board resumed its discussion
of the PIR, which focused on the findings and responses. On November 25, 2024,
the Board issued its PIR report, which marks the completion of the Board’s PIR
process for the revenue standard.
Ongoing Standard-Setting Developments
The FASB continues to develop accounting standards with revenue
implications. Recent standard-setting developments as of October 31, 2025, include
those related to the Board’s project on accounting for government
grants.
In November 2024, the FASB issued a
proposed ASU that would add guidance to ASC
832 on the recognition, measurement, and presentation of government grants. The key
proposed amendments to ASC 832 include the following:
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A government grant would be recognized when it is probable that the entity will comply with the conditions associated with the grant and the grant will be received.
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The accounting framework of IAS 20 for government grants would be leveraged. However, targeted improvements to the leveraged guidance, including refinements to its scope and the recognition threshold, would be made.
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The disclosure requirements of ASC 832 would apply to government grants within the scope of the FASB’s project on the topic.
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Specific guidance would be provided on whether and, if so, how to recognize and measure grant-related liabilities in a business combination.
For more information, see Deloitte’s November 26, 2024, Heads Up.
Stakeholders should monitor the FASB’s Web
site for further developments.
See Deloitte’s Roadmap Revenue
Recognition for a more comprehensive
discussion of accounting and financial reporting
considerations related to the recognition of revenue from
contracts with customers under ASC 606.
Contacts
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Chris Chiriatti
Audit & Assurance
Managing
Director
Deloitte &
Touche LLP
+1 203 761
3039
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If you are interested in Deloitte’s revenue recognition service
offerings, please contact:
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Will Braeutigam
Audit & Assurance
Managing
Director
Deloitte & Touche LLP
+1 713 982 3436
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