---
title: "Step 1: Identify the Contract Under ASC 606"
description: Learn how to evaluate whether a customer arrangement qualifies as a contract under ASC 606, including approval, rights, payment terms, commercial substance, and collectability.
sidebar_position: 2
slug: /asc-606/step-1-identify-the-contract
keywords:
  - ASC 606 step 1
  - identify the contract
  - revenue recognition contract criteria
  - SaaS revenue recognition
---

# Step 1: Identify the Contract

In the ASC 606 framework, the revenue recognition process begins with the identification of a contract. A contract is an agreement between two or more parties that creates enforceable rights and obligations.

## Contract Criteria

For an arrangement to be considered a contract under ASC 606, it must meet all five of the following criteria:

1. **Approval and Commitment**: The parties have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to performing their respective obligations.
2. **Identification of Rights**: The entity can identify each party's rights regarding the goods or services to be transferred.
3. **Identification of Payment Terms**: The entity can identify the payment terms for the goods or services to be transferred.
4. **Commercial Substance**: The contract has commercial substance (i.e., the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
5. **Collectability**: It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

## Platform Implementation

The Finance Automation Platform automates the evaluation of these criteria by integrating directly with your CRM and Legal systems.

### Automated Validation
When a deal is marked as "Closed/Won" in your CRM, the platform triggers a validation workflow:
- **Signature Verification**: Confirms a signed PDF or digital signature is attached via integration with tools like DocuSign or Ironclad.
- **Credit Check Integration**: Automatically pulls a credit score or history for the customer to satisfy the **Collectability** requirement.
- **Terms Parsing**: Uses AI-assisted parsing to extract payment terms and performance obligations directly from the legal agreement.

### Handling Non-Standard Contracts
If a contract fails to meet one or more of the criteria, the platform flags the record for manual review by the Revenue Accounting team. Revenue cannot be recognized until the criteria are satisfied.

## Practical Examples

### SaaS Subscription
A standard online click-through agreement typically satisfies all criteria at the point of signup, as the rights, payment terms, and commitment are clearly defined and accepted by the customer.

### Professional Services SOW
A Statement of Work (SOW) that is still in "Draft" mode does not meet the **Approval** criteria. The platform will block revenue recognition for any associated work until the status is updated to "Executed."