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ASC 606 Checklist for Step 1:
Identify the contract

A. SCOPE SCREENING (Must be done FIRST)

Does the contract fall under ANY of these guidance?

Conclusion: The arrangement is within the scope of ASC 606. Proceed to the next steps.

Conclusion: The arrangement is outside the scope of ASC 606. Please refer to appropriate guidance.

B. CONTRACT EXISTENCE (Form doesn’t matter; enforceability does)

Is there an agreement with the customer? (any one)

Conclusion: Contract exists. Please proceed to the next step.

Conclusion: Contract does not exist. No further analysis is required.

Does the contract establish legally enforceable rights and obligations?

Conclusion: No contract exists. Record the cash received as a liability.

Conclusion: Contract is legally enforceable. Please proceed to the next step.

C. WHOLLY UNPERFORMED + CANCELLABLE TEST

Either party is required to provide:

Conclusion: Based on the responses, the arrangement is subject to cancellation and does not meet the definition of a contract.

Conclusion: The contract is non-cancellable. Continue to the next step of the assessment.

E. CONTRACT TERM DETERMINATION

Check all that applies

F. CONTRACT COMBINATION CHECK

Were multiple contracts entered into:

Conclusion: Based on the responses, contract combination guidance does not apply.

Conclusion: The entity shall proceed to check if the following criteria are satisfied before accounting for as a single contract.

Conclusion: The entity shall proceed to check if the following criteria are satisfied before accounting for as a single contract.

Conclusion: No contract exists. Use alternative model and record all cash received as liability until cash is non refundable.

F. CONTRACT COMBINATION CHECK (CONTD.)

Confirm if ONE or MORE criteria is met:

Conclusion: Based on the responses, contract combination guidance does not apply.

Conclusion: The entity shall combine two or more contracts and account for them as a single contract.

Conclusion: Conclusion: Based on the responses, contract combination guidance does not apply.

G. CONTRACT MODIFICATIONS

Has the contract been modified? If YES, confirm any ONE

Conclusion: Based on the responses, contract combination guidance does not apply.

​I. SPECIAL SaaS SCENARIOS (Quick Flags)

Conclusion: Based on the responses, contract combination guidance does not apply.

D. FIVE REQUIRED ASC 606 CRITERIA (All 5 MUST be met)

Conclusion: No contract exists. Use alternative model and record all cash received as liability until cash is non refundable.

Conclusion: All ASC 606 criteria are met and a contract exists. Proceed to contract term determination.

5. Collectibility – GATING TEST

Confirm that you have evaluated ALL of the following factors as part of the above gating test assessment.

1. Approval & Commitment

2. Identifiable Rights

3. Identifiable Payment Terms

4. Commercial Substance

ASC 606 Checklist for
Step 1: Identify the contract

Instructions:

  • Answer the questions in chronological order.

  • Each subsequent question will appear only if the fact pattern falls within the scope of ASC 606.

  • Hover over the ⓘ (info) icon to understand what could potentially trigger ASC 606 guidance.

  • Click the ? (question mark) icon for additional clarification on the guidance and useful judgement triggers to look out for.

A. SCOPE SCREENING (Must be done FIRST)

Does the contract fall under ANY of these guidance?

Conclusion: This arrangement is outside the scope of ASC 606. Please refer to appropriate guidance.

Conclusion: The arrangement is within the scope of ASC 606. Proceed to the next steps.

 

Select “None of the above” if no other Codification guidance applies, confirming the arrangement is within ASC 606 and allowing you to proceed to the next questions.

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Scope & Predominance

ASC 606 applies only to enforceable promises to transfer goods or services to a customer. Contracts entirely governed by other GAAP Topics, or mixed-scope arrangements, require predominance and separation analysis before performance obligations are identified.

​

 Explicit Scope Exceptions- ASC 606‑10‑15‑2 to 15‑5

  • Even if a customer contract exists, ASC 606 does not apply if the contract is entirely within another GAAP Topic (e.g., leases, insurance, financial instruments).

  • Judgment triggers:

    • Are all promises explicitly governed by other GAAP?

    • Is there any transfer of goods or services to a customer outside the scope of that Topic?

 

Mixed-Scope Contracts & Predominance Principle - ASC 606‑10‑15‑4

  • Many contracts contain components subject to multiple GAAP Topics.

  • Required approach:

    1. Apply separation or measurement guidance in other applicable Topics (if specified).

    2. Apply ASC 606 only to the remaining customer-related components.

  • Predominance assessment (expert judgment):

    • Evaluate which component drives the economics of the arrangement:

      • Nature of the promise

      • Relative value of components

      • Primary purpose of the arrangement

      • What most significantly affects cash flows

    • Key principle: Predominance is qualitative, not a mechanical or purely quantitative test.

 

Collaborative Arrangements - ASC ASC 808‑10‑15‑5; ASC 606‑10 guidance

  • ASC 808 governs joint operations where parties actively share risks and rewards.

  • ASC 606 applies only to the components where a participant is a customer for distinct goods or services.

  • Judgment triggers:

    • Identify which promises are for customer benefit vs. collaborative performance.

    • Scoping is transaction-level, not arrangement-level.

 

Partial Scope Application - ASC 606‑10‑15‑4​

  • A single legal agreement may be partially within ASC 606.

  • ASC 606 applies only to promises to transfer goods or services to a customer.

  • Other components follow their respective GAAP guidance.

  • Key principle: Scope determination occurs before identifying performance obligations.

 

Key Takeaways​

  • Scoping is a prerequisite — do not identify performance obligations before confirming ASC 606 applicability.

  • Predominance is qualitative — focus on economics and primary purpose, not just relative value.

  • Partial contracts require component-level analysis — apply ASC 606 only where a customer relationship exists.

  • Collaborative arrangements require careful delineation of customer vs. partner transactions.

  • Audit perspective: Maintain robust documentation of scope, judgments, and GAAP interactions.

B. CONTRACT EXISTENCE (Form doesn’t matter; enforceability does)

Is there an agreement with the customer? 

Conclusion: Contract exists. Please proceed to the next step.

Conclusion: Contract does not exist. No further analysis is required.

Does the contract establish legally enforceable rights and obligations?

Conclusion: The contract is legally enforceable. You may proceed to the next step.

Conclusion: No contract exists. Record the cash received as a liability.

Select ANY ONE of the following options that apply.

A contract falls under ASC 606 only if all three criteria are met.

​Approval & Commitment — Substance over Form - ASC 606-10-25-1(a)

A contract exists only when parties have approved the arrangement and are committed to perform.

Approval may arise through:

  • Written agreements

  • Oral arrangements

  • Implied contracts via customary business practice

Key principle: Execution format is irrelevant — enforceable commitment is determinative.

 

Enforceable Rights & Obligations — The Core Test - ASC 606-10-25-1 | 25-5

Step 1 is satisfied only where the arrangement creates legally enforceable rights and obligations.

 Enforceability is a matter of law and depends on jurisdiction.

Assessment must consider:

  • Governing law provisions

  • Customer authority to contract

  • Procurement compliance

  • Bankruptcy and payment enforceability

Note: Accounting follows legal substance — not commercial intent or sales expectation.

 

Termination Rights & Contract Substantiveness - ASC 606-10-25-3

A contract does not exist if it is:

  • Wholly unperformed, and

  • Unilaterally cancellable by either party,

  • Without compensation or penalty

Implications:

  • Termination-for-convenience limits enforceable term

  • Month-to-month SaaS = rolling contracts

  • Non-refundable fees create enforceability

 

Funding & Contingency Provisions

Enforceability may be impaired where payment depends on:

  • Budget appropriations

  • Grant funding

  • Board or procurement approvals

 

Linkage: ASC 606-10-25-1 (contract criteria) and ASC 606-10-25-5 (legal enforceability)

Note: If payment rights are contingent, substantive enforceability may not exist.

 

Framework Agreements (MSAs)

  • MSAs typically establish legal architecture but not purchase commitment.

  • Without enforceable delivery rights: ASC 606-10-25-1(b) — Rights to goods/services must be identifiable.

Therefore:

  • MSA alone → Not a contract

  • MSA + Order Form / SOW → Contract

 

Cash Received Absent Enforceability - ASC 606-10-25-7

Where enforceable rights and obligations do not yet exist:

  • Step 1 fails

  • No contract exists for ASC 606 purposes

Accounting outcome: Consideration received is recorded as a contract liability until contract criteria or alternative revenue triggers are met.

B. CONTRACT EXISTENCE (Form doesn’t matter; enforceability does)

Is there an agreement with the customer? (any one)

Conclusion: Contract exists. Please proceed to the next step.

Conclusion: Contract does not exist. No further analysis is required.

Does the contract establish legally enforceable rights and obligations?

Conclusion: The contract is legally enforceable. You may proceed to the next step.

Conclusion: No contract exists. Record the cash received as a liability.

C. WHOLLY UNPERFORMED + CANCELLABLE TEST

Either party is required to provide

Conclusion: Based on the responses, the arrangement is subject to cancellation and does not meet the definition of a contract.

Conclusion: The contract is non-cancellable. Continue to the next step of the assessment.

Substantive enforceability must exist for a contract to exist

​

ASC 606-10-25-3

ASC 606 clarifies that approval alone is insufficient.

  • A contract does not exist where substantive rights and obligations have not yet arisen.

 

Wholly Unperformed — Assessment Threshold

A contract is “wholly unperformed” when both conditions apply:

  • No goods or services have been transferred

  • No consideration has been received or is receivable

This includes:

  • No service commencement

  • No license delivery

  • No activation of SaaS access

  • No non-refundable upfront payment

If any performance or non-refundable consideration exists, the contract is no longer wholly unperformed.

​

Unilateral Termination Rights

The second limb assesses whether either party can terminate:

Without:

  • Further performance obligations, and

  • Penalty, compensation, or economic consequence

Relevant termination features include:

  • Termination-for-convenience clauses

  • Pre-go-live cancellation rights

  • Refundable deposits

  • Opt-out implementation periods

If termination imposes compensation (e.g., non-refundable fees, termination penalties), enforceable rights exist.

​

Interaction with Contract Term

This guidance also informs enforceable contract term determination.

Where termination without penalty exists:

  • Enforceable term may be limited to the current period

  • Long-term pricing does not create long-term enforceability

Linkage:
ASC 606-10-25-3 + broader Step 1 enforceability framework

​

Practical SaaS Applications

Common fact patterns failing Step 1:

  • ARR booked at signature before service activation

  • Contracts cancellable prior to implementation

  • Trial periods with no commitment

  • Refundable onboarding fees

In each case, enforceable rights have not yet arisen.

Both criteria are required for further ASC 606 enforceability analysis.

D. FIVE REQUIRED ASC 606 CRITERIA (All 5 MUST be met)

1. Approval & Commitment

2. Identifiable Rights

3. Identifiable Payment Terms

4. Commercial Substance

5. Collectibility – GATING TEST

Confirm that you have evaluated all of the following factors as part of the above gating test assessment.

Conclusion: All ASC 606 criteria are met and a contract exists. Proceed to contract term determination.

Conclusion: No contract exists. Use alternative model and record all cash received as liability until cash is non refundable.

Contract Existence

A contract exists only if the arrangement creates enforceable rights and obligations, and it is probable that the entity will collect consideration to which it is entitled. Failure to satisfy any criterion precludes revenue recognition under ASC 606.

 

Approval & Commitment - ASC 606‑10‑25‑1(a)

  • Both parties must demonstrate intent and capacity to perform, either formally (signed contract), informally (oral agreement), or through established business practice.

  • Approval is substantive, not procedural. Evidence includes correspondence, emails, system approvals, or customary purchasing behaviors.

  • Judgment triggers:

    • Was there a deliberate decision to commit resources?

    • Are approvals conditional on uncertain events (e.g., funding, board approval)?

    • Would a court enforce performance?

 

Identifiable Rights - ASC 606‑10‑25‑1(b), 25‑5

  • The contract must specify deliverables, performance obligations, and customer entitlements clearly. Vague or contingent promises (e.g., “future TBD services”) are insufficient.

  • Enforceability is jurisdiction-specific; legal review may be necessary for international contracts.

  • Judgment triggers:

    • Are rights and obligations explicit and actionable?

    • Does the customer have the authority to contract?

    • Are termination or suspension rights limiting enforceability?

 

Identifiable Payment Terms - ASC 606‑10‑25‑7

  • Payment must be reasonably determinable in amount and timing.

  • Contingent payments (subject to future approvals or uncertain milestones) may preclude contract recognition.

  • Non-refundable fees, committed minimum payments, and enforceable SOWs strengthen Step 1 conclusions.

  • Judgment triggers:

    • Are the payment obligations enforceable?

    • Are amounts consistent with market practice and prior customer history?

    • Does payment dependency introduce material risk or contingency?

 

Commercial Substance- ASC 606‑10‑25‑2(c)

  • The arrangement must meaningfully affect cash flows, risk, or timing of benefits to the entity.

  • A contract with no economic consequence (customer could bypass payment without impact) fails this tes

  • Judgment triggers:

    • Does the entity assume real risk or exposure?

    • Are customer obligations structured to create economic transfer?

    • Would a hypothetical third party recognize the contract as substantive?

 

Collectability – Gating Test - ASC 606‑10‑25‑1(a), 25‑7

  • Collectability must be probable for Step 1 to be satisfied.

  • Considerations include expected consideration (net of concessions), non-cancellable term, customer creditworthiness, and rights to suspend performance.

  • Failure → no contract exists, amounts received are recorded as contract liabilities.

  • Judgment triggers:

    • Are there significant historical payment defaults?

    • Does the entity retain the right to halt performance if payments fail?

    • Are guarantees, letters of credit, or other risk mitigants present?

 

Key Takeaways

  • Step 1 is a judgment exercise, not a documentation exercise.

  • Subtle clauses matter — termination rights, renewal options, or contingent approvals can prevent recognition.

  • Collectability is the gatekeeper — all other criteria are moot if it is not probable.

  • MSAs, letters of intent, or initial agreements are insufficient without enforceable performance obligations.

  • Audit perspective: Step 1 determination must be documented with rationale, references to governing law, and risk assessment.

​

​​​​

E. CONTRACT TERM DETERMINATION

Check everything that applies

Contract Term Determination

The contract term is the period during which enforceable rights exist. Term evaluation is substance over label — formal expiration dates or auto-renewal clauses are considered only if they create enforceable economic rights.

​

Period of Enforceable Rights - ASC 606‑10‑25‑1(b), 25‑5

  • The term begins when the entity’s rights and obligations become legally enforceable and ends when the arrangement can no longer be enforced.

  • Only substantive rights that bind both parties define the term; optional or contingent periods are excluded.

  • Judgment triggers:

    • Are there start-of-service conditions or contingencies that delay enforceability?

    • Do customer approvals, funding, or regulatory conditions affect the start or end?

 

Terminable Without Penalty - ASC 606‑10‑25‑3, 606‑10‑32-34

  • If either party can terminate without consequence, the contract is effectively short-term or period-to-period.

  • Revenue recognition and collectibility must reflect this limited enforceable period.

  • Judgment triggers:

    • Does the customer have unilateral exit rights?

    • Are there ongoing obligations beyond notice periods?

    • How does termination affect cash flows and performance obligations?

​

Substantive Termination Penalty - ASC 606‑10‑25‑3

  • Contracts with meaningful penalties for early termination are considered longer-term, even if labeled month-to-month.

  • Substantive penalties create enforceable rights over the contract period and influence revenue recognition and collectibility assessment.

  • Judgment triggers:

    • Are penalties enforceable under governing law?

    • Do penalties sufficiently compensate the entity for lost cash flows?

    • Does the penalty reflect the entity’s exposure to risk and resource commitment?

 

Auto-Renewal and Material Rights - ASC 606‑10‑55‑42 through 55‑46

  • Auto-renewal clauses do not automatically extend the contract term unless they create a material right for the customer.

  • Material rights may extend revenue recognition or performance obligations, but assumed multi-year terms are not recognized without enforceable commitment.

  • Judgment triggers:

    • Does the customer have the right to renew at favorable pricing or other benefits?

    • Are renewal terms enforceable and substantial enough to affect cash flows?

    • Is there historical evidence that renewals are exercised consistently?

 

Key Takeaways

  • Contract term is enforceability-based, not label-based.

  • Substantive termination rights or penalties dictate the economic duration of the contract.

  • Auto-renewals require careful assessment for material rights; do not assume multi-year recognition.

  • Term analysis directly feeds into collectibility, revenue pattern, and performance obligation timing.

  • Audit perspective: Document rationale, judgment triggers, and cross-reference to performance obligations and collectibility evaluation.

F. CONTRACT COMBINATION CHECK

Were multiple contracts entered into:

Conclusion: Based on the responses, contract combination guidance does not apply.

Conclusion: The entity shall proceed to check if the following criteria are satisfied before accounting for as a single contract.

Contract Combination Assessment

Multiple contracts must be combined if they are with the same customer (or related parties), entered into at or near the same time, and meet one or more of the combination criteria. Combination is based on substance and economic interdependence, not just form.

​

Same Customer or Related Parties - ASC 606‑10‑25‑9(a)

  • Assess whether the contracts involve the same legal entity or entities under common control.

  • Consider related party arrangements that economically function as a single customer relationship.

  • Judgment triggers:

    • Are the entities legally distinct but economically interdependent?

    • Does common control or influence exist over decision-making?

​

Timing of Contract Execution- ASC 606‑10‑25‑9(b)

  • Contracts entered into at or near the same time may need combination if they are economically linked.

  • Timing is relative, not fixed; consider whether arrangements were negotiated together or as part of a single commercial discussion.

  • Judgment triggers:

    • Are contracts negotiated concurrently or sequentially?

    • Does one contract depend on the execution of another to achieve the commercial objective?

​

Criteria for Combination - ASC 606‑10‑25‑10

  • At least one of the following must exist for combination:

    1. Single Commercial Objective: Contracts are part of a cohesive plan to achieve a common outcome.

    2. Consideration Interdependent: Payment terms or pricing are linked such that they cannot be assessed independently.

    3. Single Performance Obligation: Goods or services cannot be distinct because they are interrelated and transferred as a single bundle.

  • If any criterion is met → contracts must be combined and treated as a single arrangement for revenue recognition.

  • Judgment triggers:

    • Are deliverables economically dependent or contingent on each other?

    • Is total consideration structured to incentivize combined performance?

    • Would separate accounting distort revenue recognition or allocation?

 

Key Takeaways

  • Contract combination is a judgment-intensive step, ensuring economic substance drives recognition.

  • Timing and related party assessment are critical — near-simultaneous agreements often require combination.

  • Only one of the combination criteria needs to be satisfied to combine contracts.

  • Combined contracts affect performance obligations, consideration allocation, and revenue timing.

  • Audit perspective: Maintain evidence of the commercial objective, interdependencies, and why combination is appropriate.

F. CONTRACT COMBINATION CHECK (CONTD.)

Confirm if ONE or MORE of the following criteria are met:

Conclusion: Based on the responses, contract combination guidance does not apply.

Conclusion: The entity shall combine two or more contracts and account for them as a single contract.

G. CONTRACT MODIFICATIONS

Has the contract been modified? If YES, confirm any ONE

Contract Modifications

A contract modification is a change in scope or price approved by the parties. The accounting treatment depends on whether the additional goods or services are distinct and whether the price reflects standalone selling prices (SSP).

​

 Identification of a Modification - ASC 606‑10‑25‑13 through 25‑18

  • A modification exists when the parties agree to add, remove, or change deliverables or price.

  • Modifications may be formal (written) or informal (mutual agreement implied through conduct).

  • Judgment triggers:

    • Has the scope of goods/services changed?

    • Has the transaction price been adjusted?

    • Is there evidence of mutual agreement or enforceability?

​

Distinct Goods/Services at SSP — Separate Contract -  ASC 606‑10‑25‑14(a)

  • If the modification adds goods or services that are distinct and priced at their standalone selling price, account for it as a separate contract.

  • Revenue recognition for the new performance obligations is independent of the original contract.

  • Judgment triggers:

    • Are the new goods/services capable of being used on their own or with other readily available resources?

    • Is the price reflective of SSP without discounting for the original contract?

​

Distinct but Not at SSP — Prospective Adjustment- ASC 606‑10‑25‑14(b)

  • When added goods/services are distinct but not sold at SSP, treat the modification as a prospective adjustment to the existing contract.

  • Adjust the transaction price and allocate across all performance obligations going forward.

  • Judgment triggers:

    • Is the pricing dependent on the original contract consideration?

    • Are discounts or bundling arrangements applied?

    • Does the modification alter future performance obligation allocation?

 

Not Distinct — Cumulative Catch-Up - ASC 606‑10‑25‑15

  • If the added goods/services are not distinct from existing obligations, the modification is accounted for as a cumulative catch-up.

  • Adjust revenue recognized to date to reflect the revised total transaction price for all obligations.

  • Judgment triggers:

    • Are the added goods/services highly interdependent or highly interrelated with existing obligations?

    • Would separate accounting misstate revenue performance?

 

Key Takeaways

  • Contract modifications are highly judgmental — distinctness and SSP drive accounting treatment.

  • Separate contracts vs. prospective vs. cumulative catch-up must be carefully justified.

  • Cumulative catch-up adjustments affect prior revenue; prospective adjustments affect only future revenue.

  • SSP assessment is critical — failure to evaluate properly can misstate transaction price allocation.

  • Audit perspective: Maintain clear evidence of the modification, rationale for treatment, and calculation of revenue impact.

H. SPECIAL SaaS SCENARIOS (Quick Flags)

Select all applicable options and account for the transaction based on the conclusions 

Special SaaS Scenarios

SaaS arrangements may involve non-traditional triggers for enforceable rights, collectibility, and performance obligations. Proper evaluation ensures compliance with Step 1, term, and performance obligation guidance.

​

 Free Trials- ASC 606‑10‑25‑1(a), 25‑7

  • Free trial periods do not constitute a contract; no enforceable rights or obligations exist until the customer commits to paid service.

  • Judgment triggers:

    • Is there any obligation on the customer to pay or continue?

    • Are services provided at no cost and without restriction during the trial?

    • Does conversion to paid service create a separate enforceable contract?

​

Continuing Service After Expiry - ASC 606‑10‑25‑1(a), 25‑3

  • Ongoing service beyond a formal contract may create an implied contract based on customary business practice or customer expectation.

  • Judgment triggers:

    • Has the customer historically continued using services without objection?

    • Does the entity have the right to enforce payment for continued service?

    • Are terms effectively renewed, even if not formally documented?

​

 Advance Payments- ASC 606‑10‑25‑1(a), 25‑7

  • Upfront payments generally mitigate collectibility risk and provide evidence of enforceable commitment.

  • Does not automatically create revenue recognition rights; revenue recognition still depends on satisfaction of performance obligations.

  • Judgment triggers:

    • Is the payment refundable?

    • Does advance payment cover future distinct obligations?

    • Are termination or refund provisions limiting enforceability?

​

Reseller / End-Customer  - ASC 606‑10‑25‑1(b), 25‑5; KPMG Handbook Q100/C100 guidance

  • Promises made to resellers or end customers may create implicit performance obligations for the SaaS provider.

  • Assess whether the entity is acting as principal (controls the promised service) or agent (facilitates another party’s service).

  • Evaluate whether promises are enforceable or customary at the time of transfer to the reseller.

  • Judgment triggers:

    • Are free support, upgrades, or updates implied by historical practice?

    • Do these obligations create additional performance obligations that affect revenue allocation?

    • Is there a reasonable expectation by the end customer that these services will be provided?

    • Does the entity control the service or bears the risks/rewards (principal) vs. acting as an intermediary (agent)?

 

Key Takeaways​

  • Free trials are not contracts; revenue recognition begins upon enforceable commitment.

  • Service continuation may imply a contract — assess historical practice and enforceability.

  • Advance payments mitigate collectibility risk but require proper allocation across performance obligations.

  • Reseller/end-customer promises may create implicit obligations — evaluate for revenue recognition and allocation.

  • Principal vs. agent assessment is critical — control and risk/reward determine gross vs. net revenue recognition.

  • Audit perspective: Document judgment, enforceability assessment, implicit obligations, and principal vs. agent determination.

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