INSIGHT

Getting Revenue Recognition Right: A Guide for Businesses

Justin J. Kay • October 13, 2026

Services: Revenue Recognition

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Revenue recognition is one of the most scrutinized areas in financial reporting, and for good reason. Whether the picture is one of rapid growth, strategic diversification, or consistency, patterns in revenue are one of the most key metrics used to tell that story to investors and other stakeholders. Get it wrong, and the consequences range from restated financials to SEC comment letters to, in serious cases, allegations of fraud. Get it right, and you create a understandable picture for investors and other stakeholders that can more easily survive auditor scrutiny and meet regulatory standards. 

For businesses navigating growth, deploying new contract structures, or preparing for the IPO process, understanding the mechanics of revenue recognition under ASC 606 is not optional. This article covers how the standard works, where companies commonly struggle, and what your team needs to have in place.  

The Framework: ASC 606 & the Five-Step Model 

ASC 606 replaced a patchwork of industry-specific revenue recognition guidance and became effective for public companies in 2018 and for most private companies in 2019. At its core, it’s built around a five-step model.  

• Step 1 requires identifying the contract with a customer. A contract, whether written or oral, must have commercial substance, create enforceable rights and obligations, and meet specific collectability criteria before revenue recognition can begin. 
• Step 2 requires identifying the performance obligations in the contract. A performance obligation is a promise to transfer a distinct good or service to the customer. The word “distinct” carries significant weight here. A good or service is distinct if the customer can benefit from it on its own, or together with resources readily available to them, and if the promise to transfer it is separately identifiable from other promises in the contract. 
• Step 3 requires determining the transaction price. This includes fixed amounts and any variable consideration, such as discounts, rebates, refunds, performance bonuses, or penalties. In some cases, if there’s a significant chance the revenue could be reversed, it should not be included in the transaction price.
• Step 4 requires allocating the transaction price to the performance obligations identified in Step 2. The allocation is based on relative standalone selling prices. When observable standalone selling prices aren’t available, companies must estimate them using methods such as the adjusted market assessment approach, the expected cost plus margin approach, or the residual approach under limited circumstances. 
• Step 5 requires recognizing revenue when that performance obligation is satisfied or being satisfied. When the customer gains control of the good or service, that’s when revenue should be recognized. This could be all at once or over a period of time. 

Point-in-Time Vs. Over-Time Recognition 

The distinction between point-in-time and over-time recognition is one of the more consequential judgments under ASC 606, and it directly affects how and when revenue hits the income statement. Revenue is recognized over time if any one of three criteria is met:  

• The customer simultaneously receives and consumes the benefits as the entity performs 
• The entity’s performance creates or enhances an asset the customer controls as it is created 
• The entity’s performance does not create an asset with an alternative use, and the entity has an enforceable right to payment for performance completed to date 

If none of those criteria are met, revenue is recognized at a specific point in time, typically when control of the good or service transfers to the customer. 

• For service businesses, subscription models, and long-term contracts, over-time recognition is often appropriate.  
• For product sales, point-in-time recognition is more common.  

These determinations can be nuanced. Frequently, contracts contain multiple performance obligations, some of which are point-in-time and others are over-time. Further analysis will be necessary in situations where contracts contain clauses related to enforceable right to payment. 

Common Application Issues 

ASC 606 requires a degree of judgement from management. Some of those judgements and estimates lead to additional auditor and regulator scrutiny. Revenue recognition for technology companies frequently involves evaluating bundled software licenses, implementation services, and post-contract support. Determining whether the software license is distinct from the implementation services, and whether the license transfers at a point in time or over the contract term, requires a detailed analysis of the contract terms and the nature of the license. 

Determining whether a company is a principal or an agent in a given transaction impacts whether a company recognizes revenue on a gross or net basis. The determination turns on whether the company controls the specified good or service before it is transferred to the customer. Getting this wrong can significantly overstate or understate reported revenue. Variable consideration is another recurring issue. Companies sometimes include overly optimistic estimates of bonuses, royalties, or contingent payments in the transaction price.

To the extent that these estimated revenues are not realized, this could result in material errors in revenue. Contract modifications (amendments that change the scope or price of an existing contract) must be accounted for as either a new contract, or a modification of the existing contract, depending on the specific facts. Each treatment produces different revenue timing, and the analysis requires documentation. 

What Your Team Needs to Have in Place 

Sound revenue recognition and audit readiness start with documented accounting policies that reflect the actual terms of your contracts. Generic policies that describe the five-step model without tying it to your specific transaction types provide limited protection when an auditor or regulator reviewer asks how you reached your conclusions. Companies should maintain contract-level documentation that supports each step of the analysis, particularly for complex arrangements.

Standalone selling price studies, variable consideration assessments, and principal versus agent analyses should be documented contemporaneously, not reconstructed after the fact. For companies with high transaction volumes and relatively standardized contracts, a portfolio approach may be appropriate. The portfolio must consist of contracts with similar characteristics, and the company must demonstrate that the portfolio approach would not produce materially different results than a contract-by-contract analysis.

Internal controls over revenue recognition should be designed to catch errors at the contract level, not just in the aggregate. That means controls must be implemented surrounding contract review, modification identification, and the inputs used to estimate variable consideration and standalone selling prices. 

Working With BPM for Revenue Recognition 

BPM’s technical accounting group provides revenue recognition services for companies at all stages of the process, from initial ASC 606 adoption and policy development to ongoing support for complex contract structures and audit readiness. The team has experience across industries, including software, SaaS, blockchain, life-sciences, professional services, construction, and manufacturing, where revenue recognition questions tend to be most technically demanding.   

If your current revenue recognition policies need a structured review, or you’re working through a complex arrangement and need a second opinion, reach out to BPM’s technical accounting group to start the conversation.