Revenue Recognition Policy Template

Collect every customer agreement in force: master agreements, order forms, statements of work, amendments and side letters. Read the signed versions, not your standard form. An amendment that changed a termination clause can change the accounting, and you won't see it in a billing export.

Then set aside what the standard doesn't cover. ASC 606 applies to contracts with customers unless another standard governs them, such as insurance or lease contracts¹. Leases follow ASC 842 and get their own lease schedule.

Give each remaining contract one row: the customer, what you sell, the revenue for the period, the stated term and the termination clause copied word for word. Add up the revenue and tie it to your income statement. If it doesn't tie, find out why before you write any policy.

ASC 606 works in five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it, and recognize revenue when or as each obligation is satisfied. The FASB set them out in Accounting Standards Update 2014-09¹, and IFRS 15 uses the same five steps².

For every contract, record the answer to each judgment below, or write "not determined" if the contract doesn't settle it. Never leave a cell blank, since a blank reads as decided. Then group contracts only where all six come out the same way.

SEC staff have asked public companies about these same judgments. In September 2018, they asked eBay how it decided when it was a principal and when an agent³ in its revenue sharing arrangements. The same letter asked whether discounts on future services were a material right. That December, they asked MDC Partners how it determined it had more than one performance obligation⁴ and how it applied its input methods.

Two judgments hide in clauses that never reach an invoice. The first is the contract term. ASC 606 applies to the period in which both parties have present enforceable rights and obligations¹, and a cancellation right can cut that period short.

Deloitte's revenue recognition roadmap works through a contract priced for two years that the customer can cancel after six months without penalty. In Deloitte's view, it generally has a six-month term⁵, and the fixed pricing beyond six months has to be checked for a material right.

The second is customer options: a renewal priced below list, free months, or credits toward future purchases. Under the standard, an option is a separate obligation only if it gives the customer a material right it would not receive without entering into that contract¹. If it does, part of today's price waits until the option is used or expires.

Write one section per judgment your contracts actually raise. Each section names the contract groups it governs, states the decision and cites the evidence behind it: the clause, the control indicators or the pricing data. A line saying revenue is recognized "in accordance with ASC 606" restates the question instead of answering it.

Some judgments won't be settled when you write. Mark them open, with an owner and a date, rather than covering them with a general principle. Then delete every rule that governs no contract you hold, such as bill-and-hold language in a software company. Leftover boilerplate teaches readers to skim.

Pricing needs a section too. If discounts, rebates, credits or penalties can change the price, ASC 606 says to estimate the amount you'll be entitled to¹, so name your method. For bundles, it splits the price in proportion to standalone selling prices¹, so say where each comes from.

So do sales commissions. ASC 340-40, added alongside ASC 606, says to capitalize the incremental costs of obtaining a contract¹, such as a commission, if you expect to recover them. If the amortization period would be a year or less, you may expense them as incurred. A sales commission calculation template tracks what you pay.

Test the draft by counting. For each judgment, how many contracts need it, and how many does the policy decide? The gap is your to-do list, ranked by the revenue behind each item. Count again after any new contract form or product launch, since either can create a judgment no rule covers.

Roll deferred revenue forward by contract group, tied to the balance sheet at both ends, to show how much of it rests on open judgments. Reconcile it monthly with your other balance sheet accounts. Keep a short summary of the policy in your accounting policy manual, with the full version beside it.

US GAAP also requires you to disclose the judgments that significantly affect the amount and timing of revenue¹, though private companies may leave out some of the detail. A policy organized by judgment gives you a head start on that note.

The template on this page includes a sample policy written this way, plus the sheets to test yours. With Edit with AI, River builds the register from your contracts and scores your current policy against it.