Revenue Recognition Agent

ASC 606 / IFRS 15 revenue recognition analysis and compliance for SaaS, services, and multi-element arrangements. Guides the 5-step recognition model, identifies performance obligations, determines transaction prices, allocates revenue across obligations, and tracks deferred/contract revenue. Produces journal entries, deferred revenue schedules, and disclosure checklists for audit-ready financials. Use when: recognizing revenue for contracts with customers, reviewing SaaS subscription treatment, analyzing multi-element bundles, booking deferred revenue, or preparing ASC 606 footnote disclosures. NOT for: tax revenue recognition (different rules), government contracts under ASC 808, or lease accounting (use ASC 842 guidance).

# Revenue Recognition Agent

ASC 606 / IFRS 15 revenue recognition for SaaS, professional services, and
multi-element arrangements. Covers the full 5-step model, deferred revenue
scheduling, journal entries, and audit disclosure checklists.

---

## When to Use This Skill

**Trigger phrases:**
- "How do we recognize this SaaS contract?"
- "Is this deferred revenue or revenue?"
- "Walk me through ASC 606 for this deal"
- "We have a multi-element arrangement — how do we split revenue?"
- "Customer paid upfront for 12 months — when do we book it?"
- "What are our performance obligations?"
- "Help me prepare the ASC 606 footnote disclosure"
- "SSP analysis for our pricing tiers"

**NOT for:**
- Tax revenue recognition — tax timing rules differ significantly from GAAP
- Government contracts under collaborative arrangements (ASC 808)
- Lease revenue — use ASC 842 / IFRS 16
- Insurance contract revenue — use ASC 944 / IFRS 17
- Financial instrument income (interest, dividends) — use ASC 320/ASC 835
- Crypto/token revenue — highly fact-specific, escalate to Irfan

---

## The 5-Step Model (ASC 606 / IFRS 15)

All revenue recognition flows through these five steps:

```
STEP 1: Identify the contract(s) with a customer
STEP 2: Identify the performance obligations in the contract
STEP 3: Determine the transaction price
STEP 4: Allocate the transaction price to the performance obligations
STEP 5: Recognize revenue when (or as) each obligation is satisfied
```

---

## Step-by-Step Guidance

### Step 1: Identify the Contract

A contract exists when ALL of these are met:

```
CONTRACT CRITERIA CHECKLIST (ASC 606-10-25-1)
─────────────────────────────────────────────
□ Parties have approved the contract (written, oral, or implied)
□ Each party's rights regarding goods/services are identifiable
□ Payment terms for the goods/services are identifiable
□ Contract has commercial substance
□ It is probable the entity will collect the consideration
```

**Collection probability assessment:**
- Review customer credit history, payment terms, and industry
- If collection is NOT probable → no revenue until collected
- Variable consideration subject to constraint (Step 3)

**Contract modifications:**
- Distinct new goods/services + standalone selling price → new contract
- Not distinct or not at SSP → modify original contract (prospective or cumulative catch-up)

---

### Step 2: Identify Performance Obligations

A performance obligation is a **promise to transfer a distinct good or service**.

**Distinct test (both criteria must be met):**
```
1. CAPABLE OF BEING DISTINCT: Customer can benefit from 
   the good/service on its own or with readily available resources.

2. DISTINCT WITHIN THE CONTRACT: Promise is separately 
   identifiable from other promises in the contract.
```

**Common SaaS / services obligations:**

| Arrangement Element | Typically Distinct? | Notes |
|---------------------|---------------------|-------|
| SaaS subscription | Yes (standalone) | Recognize ratably over term |
| Implementation/setup | Maybe | If customer can't benefit without SaaS → not distinct → combine |
| Training | Usually yes | Can purchase separately |
| Premium support | Yes | Separately priced, standalone value |
| Professional services (scoped) | Usually yes | Separate SOW |
| Professional services (highly integrated) | No | Combine with software |
| Content/data licenses | Yes | Distinct IP license |
| Hardware bundled with SaaS | Usually yes | Can use hardware independently |

**Series of distinct services:**
- SaaS subscriptions = series of distinct services (each day/month of access)
- Treated as single performance obligation
- Revenue recognized ratably (straight-line) over subscription period

---

### Step 3: Determine the Transaction Price

Transaction price = consideration the entity expects to be entitled to.

**Components to analyze:**

```
Transaction Price Components
─────────────────────────────────────────────
1. FIXED CONSIDERATION
   → Contract price net of discounts

2. VARIABLE CONSIDERATION
   Types: discounts, rebates, refunds, credits, 
          price concessions, incentives, performance bonuses,
          royalties, contingent payments
   
   Estimation methods:
   a) Expected value (probability-weighted) — best for many outcomes
   b) Most likely amount — best for two outcomes (binary)
   
   CONSTRAINT: Include variable consideration only to the extent
   it is probable a significant revenue reversal will NOT occur.

3. SIGNIFICANT FINANCING COMPONENT
   If >12 months between payment and delivery AND financing is
   a significant benefit → adjust for time value of money.
   
   Practical expedient: If contract < 1 year, ignore financing.

4. NON-CASH CONSIDERATION
   Measure at fair value of non-cash consideration received.

5. CONSIDERATION PAYABLE TO CUSTOMER
   (Discounts, coupons, rebates)
   → Reduce transaction price unless payment is for distinct good/service
```

---

### Step 4: Allocate Transaction Price

Allocate based on **Standalone Selling Price (SSP)** of each performance obligation.

**SSP determination methods (in order of preference):**

```
1. OBSERVABLE PRICE
   → Actual price when entity sells the good/service separately.
   → Best evidence. Use when available.

2. ADJUSTED MARKET ASSESSMENT APPROACH
   → Price the market would pay for the good/service.
   → Research competitor pricing, customer willingness to pay.

3. EXPECTED COST PLUS MARGIN APPROACH
   → Forecast costs to satisfy the obligation + appropriate margin.

4. RESIDUAL APPROACH (limited use)
   → SSP = Transaction price - sum of SSPs of other obligations.
   → Only permitted if SSP is highly variable or uncertain.
```

**Allocation example:**

```
Contract: $12,000 annual SaaS deal
Includes: SaaS license + Implementation + Training

Element           SSP       Allocation %   Allocated Price
─────────────────────────────────────────────────────────
SaaS License      $10,000      71.4%          $8,571
Implementation    $2,500       17.9%          $2,143
Training          $1,500       10.7%          $1,286
─────────────────────────────────────────────
Total SSP         $14,000      100%           $12,000

Note: Contract price ($12k) is less than total SSP ($14k) —
the $2,000 discount is allocated proportionally across all obligations.
```

---

### Step 5: Recognize Revenue

**Over time** (straight-line or input/output method) when ANY criterion is met:
```
□ Customer simultaneously receives and consumes the benefits
  (→ SaaS subscriptions, most services)
□ Entity's performance creates or enhances an asset the 
  customer controls (→ customized software for customer)
□ Entity's performance creates no alternative use AND entity
  has right to payment for work completed to date (→ custom dev)
```

**At a point in time** (when control transfers) for all other obligations:
```
Indicators of control transfer:
□ Entity has right to payment
□ Customer has legal title
□ Entity has transferred physical possession
□ Customer has significant risks and rewards
□ Customer has accepted the asset
```

**Common patterns:**

| Obligation Type | Recognition Pattern | Measure |
|----------------|---------------------|---------|
| SaaS subscription | Over time | Straight-line over term |
| Professional services (T&M) | Over time | Hours incurred / total estimated |
| Fixed-fee project | Over time | % complete (input method) |
| Software license (functional IP) | Point in time | License delivery date |
| Software license (symbolic IP) | Over time | Ratably |
| Training (one-time) | Point in time | Date training is delivered |
| Hardware sale | Point in time | Delivery / acceptance |

---

## Deferred Revenue Scheduling

### SaaS Subscription Schedule

For a $12,000 annual contract starting March 1, 2026 (fiscal year = calendar):

```
CONTRACT REVENUE SCHEDULE
─────────────────────────────────────────────────────────────
Contract:    Acme Corp — Annual SaaS License
Period:      March 1, 2026 –