Revenue Recognition (ASC Topic 606): Transaction Price Part 1

The new (ASC 606) revenue recognition standard outlines five steps for proper compliance.  At the surface, these steps seem simple.  However, there are many components that should be considered within each step based on your company’s processes and industry.  Previous courses in this series have covered the standard at a high level and evaluated step one and two of the standard.  They are:

• Complying with the Revenue Recognition Standard
• Revenue Recognition:  Considerations for Identifying the Contract – Part One
• Revenue Recognition:  Considerations for Identifying the Contract – Part Two
• Revenue Recognition:  Considerations for Performance Obligations – Part One
• Revenue Recognition:  Considerations for Performance Obligations – Part Two

This segment is designed to evaluate Step Three of the new model dealing with Determining the Transaction Price.

Determining transaction price is more difficult than it may first appear. Transaction price is the basis for measuring revenue. It is the amount of consideration the entity expects to be entitled to in exchange for transferring promised goods or services. Determining transaction price requires election of policies and significant use of judgment.

Completing this step for fixed price contracts can be straightforward. However, the path becomes convoluted for variable priced contracts.  The new revenue recognition standard identifies three areas that affect the estimate of transaction price, which we will review:

• Nature of consideration
• Timing of consideration
• Amount of consideration 

Note: Information within this course comes from readily available public domain documents and is utilized by the trainer as a supplement for relaying the course content.