ASC 605-25 Multiple-Element Revenue Recognition: Explanation & Journal Entries

Posted In | ASC Education | Gridlex Academy

Accounting Standards Codification (ASC) Topic 605-25, "Revenue Recognition - Multiple-Element Arrangements," provides guidance on how to allocate revenue to different elements in a multiple-element arrangement. A multiple-element arrangement occurs when an enterprise enters into a contract with a customer to deliver multiple products or services, which are often referred to as deliverables. The legacy standard, ASC 605-25, is no longer the primary guidance for revenue recognition, as it has been superseded by ASC 606, "Revenue from Contracts with Customers." However, understanding the historical approach under ASC 605-25 can provide valuable context for the evolution of revenue recognition standards. This article will explain the concept of revenue allocation transactions under ASC 605-25 and provide examples of journal entries that illustrate the proper accounting treatment for these transactions.

 

Revenue Allocation Transaction

Under ASC 605-25, an enterprise must allocate the total contract consideration to each deliverable based on its relative selling price. The relative selling price can be determined using vendor-specific objective evidence (VSOE), third-party evidence (TPE), or best estimated selling price (ESP). Once the revenue allocation is determined, the company recognizes revenue for each deliverable as it is delivered, provided the other revenue recognition criteria are met.

 

Journal Entries for Revenue Allocation Transaction

To better understand the accounting treatment for revenue allocation transactions under ASC 605-25, let's look at a hypothetical example.

 

Example:

Company C enters into a contract with a customer to deliver a software license, one year of maintenance services, and two years of technical support for a total contract price of $10,000. Company C determines the following relative selling prices for each deliverable:

 

Journal Entry 1: Record the contract liability

Company C would record the following journal entry when the contract is signed:

 

Debit: Cash $10,000

Credit: Unearned Revenue $10,000

 

The debit to cash represents the cash received from the customer, while the credit to unearned revenue represents the contract liability for the multiple-element arrangement.

 

Journal Entry 2: Allocate revenue to each deliverable

Upon delivering the software license, Company C would allocate the revenue based on the relative selling prices and recognize the revenue for the delivered element:

 

Debit: Unearned Revenue $4,000

Credit: Revenue - Software License $4,000

 

This entry reduces the unearned revenue and recognizes the revenue for the software license.

 

Journal Entry 3: Recognize revenue for maintenance services and technical support

As Company C fulfills its obligations for maintenance services and technical support, it would recognize the revenue for these deliverables over time:

 

Debit: Unearned Revenue $3,000 (for Maintenance Services)

Debit: Unearned Revenue $3,000 (for Technical Support)

Credit: Revenue - Maintenance Services $3,000

Credit: Revenue - Technical Support $3,000

 

These entries reduce the unearned revenue and recognize the revenue for the maintenance services and technical support as they are provided.
 

ASC 605-25 provided a framework for allocating and recognizing revenue in multiple-element arrangements under the legacy standard. While ASC 606 has since replaced it as the primary guidance for revenue recognition, understanding the historical approach can be helpful in grasping the evolution of revenue recognition principles. By studying the allocation and recognition methods under ASC 605-25, accountants and financial professionals can gain valuable insights into the development of revenue recognition standards and their application in various business contexts and industries.