Five steps of revenue recognition under ASC 606 for a typical sale with distinct performance obligations: which sequence is correct?

• A. Identify contract; Determine transaction price; Identify performance obligations; Allocate price to each performance obligation; recognize revenue when obligations are satisfied.
• B. Identify contract; identify performance obligations; determine transaction price; allocate price to each performance obligation; recognize revenue when (or as) each obligation is satisfied.
• C. Identify performance obligations; identify contract; determine transaction price; recognize revenue.
• D. Recognize revenue; identify contract; allocate price; identify performance obligations.

Answer: (B)

ASC 606 uses a five-step sequence to recognize revenue, and the order matters. You start by identifying the contract with the customer, which establishes the enforceable rights and obligations. Next, you identify the performance obligations—the promises in the contract to transfer goods or services that are distinct. Knowing what you’ve promised is essential before you decide how much revenue to recognize. Then you determine the transaction price—the total consideration you expect to receive. Once you have the price, you allocate it to each identified performance obligation based on relative standalone selling prices. Finally, you recognize revenue when or as each obligation is satisfied, i.e., when control of the promised good or service transfers to the customer, whether at a point in time or over time.

This sequence fits a typical sale with distinct obligations because you can’t allocate or recognize revenue meaningfully without first knowing what was promised and what you expect to be paid. The alternative orders misplace steps—either trying to determine price before identifying obligations, skipping allocation, or recognizing revenue before the contract and obligations are clear.