ASC 606 replaced industry-specific guidance with one principles-based standard. The principle: revenue is recognized when control of a good or service transfers to the customer for the amount the entity expects to collect. The five steps are the operational shape of that principle: every rev rec decision a senior accountant makes lives inside one of the five.
The five steps in one row
The ASC 606 model, with the question each step answers
What each step actually decides
| Step | Where the judgment sits |
|---|---|
| 1. Identify the contract | Collectibility threshold. Side letters and verbal modifications. Combining multiple contracts entered at or near the same time with the same customer. |
| 2. Identify POs | Distinct in the contract and distinct in the context of the contract. Series of similar goods or services treated as a single PO. |
| 3. Determine price | Variable consideration (rebates, refunds, tiers, bonuses) constrained to amounts probable of not reversing. Non-cash, significant financing component. |
| 4. Allocate | Standalone selling price. Observable when sold separately, otherwise estimated. Discount allocation when SSPs don't sum to transaction price. |
| 5. Recognize | Over time if one of three criteria is met. Otherwise at a point in time when control transfers. Measure of progress (input vs output methods). |
A worked example in three numbers
SaaS contract. Annual subscription $120K. Implementation services $30K. Total contract value $150K. SSPs say subscription is worth $120K, implementation $20K. The total of SSPs ($140K) is less than the contract value ($150K), so the customer is paying a $10K premium that gets allocated proportionally.
| Performance obligation | Allocation calc | Allocated TP | Recognition pattern |
|---|---|---|---|
| PO 1, Subscription | $120K × ($150K / $140K) | $128.6K | Ratably over 12 months |
| PO 2, Implementation | $20K × ($150K / $140K) | $21.4K | When substantially complete |
| Total | Preserves SSP weights | $150K | Sums to transaction price |
The premium follows the relative SSP weights, it doesn't disproportionately favor one PO. The recognition pattern for each PO follows the allocated transaction price, not the SSP itself.
Steps don't stay sequential
The model reads as a clean Step 1 → Step 5 progression. Contracts don't behave that way. A modification lands and pushes the work back to Step 2 (is the added scope a new PO?) and Step 4 (does the allocation need to recompute?) without touching Step 1 or Step 5. A variable consideration true-up at quarter-end runs only Steps 3 and 5. A new PO discovered late in the contract life runs Steps 2, 4, and 5 again on the existing balance.
This is the part of ASC 606 that tools rarely capture. Each step has its own trigger, its own evidence trail, and its own audit population. The work product isn't a single rev rec schedule: it's five workflows that fire on different events and need to reconcile to each other on every reporting date.
See it in motion
Cadel's revenue recognition workflow, end to end
What good looks like
A clean ASC 606 implementation has each of the five steps running as its own engine, triggered by the right contract event, posting the right delta, and preserving the audit population the next step relies on. Steps 2 and 4 should re-fire automatically on every modification. Step 3 should re-fire on every variable consideration true-up. Step 5 should produce a recognition schedule that regenerates from source, covered in more detail in the revenue reconciliation explainer on tying bookings, billings, and recognized revenue together.
See how Cadel handles end-to-end revenue recognition under ASC 606, or get in touch to walk through one of your contracts in the five-step model.