What Is the Series Guidance in ASC 606?

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 606 provides a framework for recognizing revenue. A provision within this guidance, known as the “series guidance,” simplifies accounting for certain recurring deliverables in a contract. It allows a company to account for a series of distinct goods or services that are substantially the same and have the same pattern of transfer as a single performance obligation. For example, instead of treating each weekly cleaning service in a year-long contract separately, a company can bundle them into one.

Identifying a Series of Distinct Goods or Services

For goods or services to be treated as a single performance obligation under the series guidance, two criteria must be met. The distinct goods or services must be “substantially the same,” and they must have the “same pattern of transfer” to the customer. This assessment is part of the second step of the revenue recognition model, which involves identifying the performance obligations in a contract.

Substantially the Same Goods or Services

The first criterion requires that the goods or services in the series are substantially the same. This implies that each item is of a similar nature and provides a similar benefit to the customer. For instance, a contract for daily janitorial services would likely qualify, as each day’s cleaning is the same service.

In contrast, a contract to develop three different software modules with unique functionality would not meet this criterion. The determination depends on whether the customer perceives each installment as a repetition of the same promise.

Same Pattern of Transfer

The second criterion is that the distinct goods or services have the same pattern of transfer. This condition is met if two underlying requirements are fulfilled. First, each distinct good or service in the series must satisfy the criteria for being a performance obligation satisfied over time.

Second, the same method must be used to measure progress toward completion for each distinct good or service in the series. For example, if a company provides continuous access to a software platform, control transfers evenly over the subscription period. Since progress would be measured the same way for each increment of time, it meets this condition.

Accounting for a Series as a Single Performance Obligation

Once an arrangement is identified as a series, it is accounted for as a single performance obligation. The total consideration for the series is recognized as revenue as this combined obligation is satisfied over time. An entity must select a method that faithfully depicts its performance in transferring control to the customer.

Output Methods

Output methods recognize revenue based on direct measurements of the value transferred to the customer, such as units produced or delivered. For a series, this means tracking the cumulative output to date relative to the total expected output. For example, a contract to process a specific number of transactions over a year could be treated as a series. The company would recognize revenue based on the number of transactions processed each period as a proportion of the total.

Input Methods

Input methods recognize revenue based on an entity’s efforts, such as costs incurred or labor hours expended. This method is suitable when there is a direct relationship between the entity’s inputs and the transfer of control. The revenue recognized is the proportion of inputs expended to date relative to the total expected inputs for the entire series. For example, a contract for monthly research services could use labor hours to measure progress if the effort is consistent.

Time-Based Measure (Practical Expedient)

ASC 606 offers a practical expedient for many series arrangements. If an entity’s performance is consistent over the contract term, it can recognize revenue on a straight-line basis. This is a time-based measure of progress where an equal amount of revenue is recognized in each period.

This method is common for contracts like SaaS subscriptions or other fixed-fee service arrangements where the customer receives the benefit evenly. For a 12-month, $12,000 service contract, the company would recognize $1,000 in revenue each month.

Practical Application and Examples

Scenario: SaaS Subscription

A company, TechCloud, enters into a one-year contract with a customer for a SaaS subscription for a total fee of $24,000. The customer gains continuous access to the platform over the 12-month period. This service qualifies as a series because access to the same software is provided continuously.

The pattern of transfer is the same, as the customer receives the benefit over time. Given the nature of the service, the time-based practical expedient is the most appropriate method. TechCloud would recognize revenue on a straight-line basis, resulting in $2,000 of revenue each month.

Scenario: Transaction Processing

A company, PayCore, signs a contract to process credit card transactions for a retail client for a fee of $0.10 per transaction. Each transaction processed is a distinct service that is substantially the same as every other. The arrangement qualifies as a series and is treated as a single performance obligation.

An output method is the most suitable approach. If PayCore processes 400,000 transactions in the first quarter, it would recognize $40,000 in revenue.

Required Disclosures for Series Arrangements

When a company applies the series guidance, it must provide specific disclosures in its financial statements to ensure transparency. A primary requirement is a description of the performance obligations, including an explanation that the recurring goods or services are treated as a single performance obligation. The company must also disclose the methods used to recognize revenue, specifying whether output or input methods are used and how progress is measured.

Furthermore, entities must disclose significant judgments made in applying the guidance. This includes the rationale for determining that a series of goods or services qualifies for this treatment and why a chosen method, like the straight-line method, appropriately depicts the transfer of control.