Learn · Explainer

Revenue recognition (ASC 606)

When a sale counts as revenue: the five steps, revenue over time or at a point in time, and gross vs. net, with Workday's and Apple's 10-Ks.

The five steps

Every company follows the same sequence, and many spell it out in their 10-K. Workday's 10-K for fiscal 2026 lists them like this:

1. Identification of the contract, or contracts, with a customer.
2. Identification of the performance obligations in the contract: each distinct good or service the company has promised.
3. Determination of the transaction price, including discounts, rebates and other amounts that may vary.
4. Allocation of the transaction price to the performance obligations, usually in proportion to what each would sell for on its own.
5. Recognition of revenue when, or as, each obligation is satisfied.

At a point in time or over time

A phone handed over in a store is revenue at that moment. A software subscription is delivered every day of the contract, so the revenue is spread across it. Workday says its subscription revenue is generally recognized on a ratable basis over the contract term, starting when the service is made available. Money a customer pays up front for that service sits on the balance sheet as deferred revenue until it's earned, and contracted amounts still to be delivered show up in remaining performance obligations.

One sale, two obligations: Apple

Apple's 10-K for fiscal 2026 splits the price of an iPhone, Mac or iPad into two performance obligations. The first, and by far the larger, is the hardware and bundled software delivered at the time of sale. The second is the right to certain bundled services, such as iCloud and Maps, which Apple delivers over time. Apple allocates the price between them based on their relative stand-alone selling prices, so a small slice of each device sale is recognized later, as the services are provided.

Gross or net

When a company sells something another business provides, it has to decide whether it's the principal (and books the full price as revenue) or an agent (and books only its fee). Apple's 10-K says it accounts for third-party app sales on the App Store on a net basis, recognizing in services net sales only the commission it retains. A reseller that takes on the inventory and sets the price would usually book the full amount instead. The choice changes revenue a lot and profit not at all, which is why margins of agents and principals aren't directly comparable.

Where to find it in a 10-K

• Note 1 or 2, accounting policies: the company's revenue recognition policy, often with the five steps.
• A revenue note: revenue broken down by product, region or timing, plus contract balances.
• Critical accounting estimates, in the MD&A: the judgments that most affect the numbers, such as how distinct obligations are identified.
• The auditor's report: revenue is a common critical audit matter. The auditor's report explains what that means.

More in Learn and Tools · Methodology & Disclosures explains where every number comes from.