Step 1: Identify the Contract
When Does a Contract Exist?
A contract exists when two or more parties create enforceable rights and obligations. Revenue recognition begins only if specific criteria indicate that collection of consideration is probable.
- The contract has commercial substance.
- Each party has approved the agreement.
- Rights of each party can be identified.
- Payment terms are identifiable.
- Collection of consideration is probable.
Note
If collection is not probable, revenue generally cannot be recognized until certain conditions are met.
Summary
Revenue recognition begins only after determining that a valid contract exists under ASC 606.