FAR, Financial Accounting and Reporting

Sources for Revenue from Contracts with Customers

Last reviewed 2026-10-07

The standards and authorities behind PocketCPA's FAR lessons on Revenue from Contracts with Customers. The topic rests on ASC 606.

About this topic

Revenue is what a company earns from the goods and services it sells. It is the single largest number on most income statements and the one investors watch most closely, so the FASB built a single, industry-neutral model for it.

ASC 606 replaced dozens of older, industry-specific rules with one framework. That framework applies to nearly every contract an entity has with a customer.

Key points

• Revenue is recognized when a performance obligation is satisfied by transferring control of a good or service to the customer.
• The five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate, and recognize.
• Variable consideration is estimated and constrained to the amount not expected to reverse significantly.
• A performance obligation satisfied over time requires a measure of progress; a point-in-time obligation recognizes revenue on transfer of control.

What the lessons cover

1. Step 1: Identify the contract (ASC 606-10-25-1)
2. Step 2: Identify the performance obligations (ASC 606-10-25-14)
3. Step 3: Determine the transaction price (ASC 606-10-32-2)
4. Step 4: Allocate the transaction price (ASC 606-10-32-31)
5. Step 5: Recognize revenue when obligations are satisfied (ASC 606-10-25-27)
6. Contract modifications (ASC 606-10-25-12 and 25-13)
7. Presentation: contract assets, contract liabilities, and receivables (ASC 606-10-45-1 through 45-4)
8. Principal versus agent (gross versus net) (ASC 606-10-55-36 through 55-39)
9. Specific arrangements: repurchase, consignment, and bill-and-hold (ASC 606-10-55-66 through 55-84)
10. Contract costs (ASC 340-40)
11. Disclosures (ASC 606-10-50)
12. Licenses of intellectual property (ASC 606-10-55-54 through 55-65B)

Authoritative references

Where these requirements sit in the literature.

• ASC 606-10-25-19 gives the two criteria that must both hold for a promised good or service to be distinct, and therefore accounted for separately.
  • The customer can benefit from it either on its own or together with resources readily available to the customer.
  • The entity's promise to transfer it is separately identifiable from the other promises in the contract.
• ASC 606-10-25-27 sets the over-time test.
  • The test itself. An entity transfers control over time, and so recognizes revenue over time, if one of three criteria is met.
  • The third criterion, no alternative use plus an enforceable right to payment for performance completed to date, is elaborated in ASC 606-10-25-28 and 25-29.
  • If none of the three is met, the obligation is satisfied at a point in time under ASC 606-10-25-30.
• ASC 606-10-25-12 is the separate contract test for a modification, and it requires both an increase in scope from distinct goods or services and an increase in price reflecting their standalone selling prices.
  • A modification that fails the test falls into ASC 606-10-25-13, which sorts the remaining promised goods and services three ways.
  • Prospective treatment applies where they are distinct from those already transferred.
  • A cumulative catch-up applies where they are not.
  • A combination of the two applies where the remainder is a mix.
• ASC 606-10-32-8 permits exactly two methods for estimating variable consideration.
  • The expected value, which is the probability-weighted amount.
  • The most likely amount.
  • The choice between them is not free. The entity uses whichever method it expects to better predict the consideration it will be entitled to.
• ASC 606-10-32-11 is the constraint: variable consideration enters the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur once the uncertainty is resolved. ASC 606-10-32-12 lists the factors that make a reversal more likely or larger.
• ASC 606-10-45-3 and 45-4 draw the line between a contract asset and a receivable.
  • A contract asset is a right to consideration conditioned on something other than the passage of time.
  • A receivable is unconditional, meaning only time stands between the entity and payment.
  • ASC 606-10-45-2 requires a contract liability when the customer pays or payment becomes due, whichever is earlier.
• ASC 606-10-55-23 and 55-27 carry the right of return mechanics.
  • Revenue is recognized only for the consideration the entity expects to keep.
  • A refund liability is recognized for the rest.
  • An asset for the right to recover the returning products is recognized separately, measured by reference to their former carrying amount.
• ASC 606-10-55-36 is the principal versus agent test. Where another party is involved in providing goods or services to the customer, the entity determines whether its promise is to provide the specified good or service itself (principal) or to arrange for the other party to provide it (agent).
  • ASC 606-10-55-37 makes control before transfer the deciding factor.
  • ASC 606-10-55-38 makes the agent's revenue the fee or commission.
  • ASC 606-10-55-39 lists indicators of that control, expressly not an exhaustive set, among them primary responsibility for fulfilling the promise, inventory risk, and discretion in establishing the price.
• ASC 606-10-50-8 is the contract balances disclosure.
  • The balances are the opening and closing balances of receivables, contract assets, and contract liabilities.
  • The revenue figure is revenue recognized in the period that was included in the contract liability balance at the beginning of the period.
  • Revenue recognized from performance obligations satisfied in previous periods is a separate requirement at ASC 606-10-50-12A, moved there from 50-8(c) by ASU 2016-20.
• ASC 606-10-55-59 sorts intellectual property into two kinds.
  • Functional IP has significant standalone functionality, such as the ability to process a transaction, perform a function or task, or be played or aired.
  • Symbolic IP has none, and derives substantially all of its utility from association with the entity's past or ongoing activities.
  • A license to symbolic IP is a right to access satisfied over time (ASC 606-10-55-60).
  • A license to functional IP is a right to use satisfied at a point in time (ASC 606-10-55-62 and 55-63).
  • ASC 606-10-55-58A and 55-58B carry those two timing answers, and ASC 606-10-55-58C bars revenue before the license period begins.
• ASC 606-10-55-65 is the sales-based or usage-based royalty exception.
  • The rule. Notwithstanding the constraint, revenue is recognized at the later of the licensee's subsequent sale or usage and the satisfaction of the performance obligation to which the royalty is allocated.
  • ASC 606-10-55-65A confines it to royalties relating only to a license of intellectual property, or for which the license is the predominant item.
  • ASC 606-10-55-65B makes it all or nothing for a given royalty.
• ASC 340-40-25-5 through 25-8 govern the costs to fulfill a contract: another Topic first, three criteria for an asset, and four costs always expensed.
• ASC 340-40-35-3 through 35-6 carry the impairment test for contract cost assets, its measurement, its ordering after other Topics, and the bar on reversal.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.

See also

• Sources for every FAR topic
• Free FAR sample questions
• The CPA exam glossary