What is the first step in ASC 606 revenue recognition?

• A. Identify performance obligations
• B. Identify the contract with a customer
• C. Determine the transaction price
• D. Recognize revenue when satisfied

Answer: (B)

Identifying the contract with a customer is the first step because revenue recognition hinges on there being an agreement that creates enforceable rights and obligations for both parties. The contract defines what is promised (the goods or services) and the terms for payment, which sets the foundation for everything that comes next. Without a valid contract, you can’t determine what obligations exist or how the transaction price will be allocated, so you can’t properly recognize revenue.

After establishing the contract, you would identify the promised goods or services as performance obligations, then determine the transaction price, allocate that price to the performance obligations, and finally recognize revenue when control of the goods or services is transferred.