Step 1: Identifying the Contract with the Customers

 

Identify the Contract with the Customer:

This stage encompasses the assessment of the contract's presence between the company and the customer.

• Approval and commitment: It is imperative for the company to verify the presence of a shared understanding and commitment between the involved parties. This necessitates the existence of legally enforceable rights and responsibilities for both the company and the customer. The contract can take various forms, including written, verbal, or inferred through customary business norms.
• Identification of rights: The contract should delineate the entitlements of the parties, which encompass the goods or services slated for transfer, any distinct performance commitments, and the stipulated payment conditions.
• Payment terms and collectability: The contract ought to feature clear payment conditions, encompassing details like the sum and schedule of consideration. The company must evaluate the likelihood of collecting the consideration to establish whether it's probable to receive the entitled amount.
• Commercial substance: The contract should possess commercial significance, signifying that it will lead to a substantial alteration in the company's cash flows, expenses, or risks.
• Parties' ability and intention to perform: Both the company and the customer must possess the capability and willingness to fulfill their individual responsibilities as outlined in the contract.

In the absence of an identified contract, recognition of revenue under ASC 606 is postponed until a contract is determined to exist. This stage lays the groundwork for the subsequent phases of the revenue recognition model by creating the contractual framework in which the company's obligations and performance are assessed..