Introduction
Since its inception in 2014, Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers has been a significant financial reporting challenge for many public entities. During 2024 and 2025, revenue recognition remained a top issue flagged by the Securities and Exchange Commission (SEC), ranking among the top five SEC comment letter topics in those years.1
This article provides a brief synopsis of several top revenue recognition issues in 2024 and 2025, illustrates them with examples from SEC comment letters, and shares key insights for public companies looking to improve their revenue reporting and avoid or reduce SEC comments on the topic.
Current SEC Focus on Revenue Recognition
Because revenue recognition guidance in ASC 606 is largely principle-based, its application often requires significant judgment on the part of management. ASC 606 is principle-based because it does not rely on specific rules and exclusions for every type of industry and situation; instead, it provides overall principles that individual companies must apply to their unique business models. For these reasons, the SEC often has a different perspective from public registrants on how those registrants should recognize or disclose revenue.
While the full list of current challenges with revenue recognition is extensive, this article focuses on a few of the major topics:
- Recognizing revenue as a principal vs. an agent (using gross vs. net amounts)
- Disaggregation of revenue disclosures
- Contract balance and remaining performance obligation disclosures
- Variable consideration
- Noncash consideration
Principal vs. Agent (Gross vs. Net Revenue)
In determining what amount of revenue to recognize when multiple parties are involved in providing goods or services to a customer, an entity must identify itself as either a principal or an agent. If a company controls goods or services immediately before transferring them to the customer, it is the principal and should recognize gross revenue. On the other hand, if a company simply arranges for another entity to provide goods or services to the customer, it is an agent and should recognize net revenue (See ASC 606-10-55-36 through 55-39).2 To help an entity determine if it has control over the goods or services before transferring them to the customer, the FASB’s guidance includes three indicators of control:
- The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
- The entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return).
- The entity has discretion in establishing the price for the specified good or service.3
See this article for a more detailed explanation of principal vs. agent considerations.
Examples: GMTech and Peloton
GMTech
In a series of January 2024 comment exchanges, the SEC noted that GMTech, a subscription-based AI platform, recognized gross revenue but used third-party providers to fulfill some of its service contracts. The SEC then requested detailed information from GMTech about how the company determined it was the principal in these contracts.
In response, GMTech walked through its analysis of ASC 606-10-55-36 through 55-39, especially focusing on the three indicators of control. GMTech explained that it contracts directly with the end customer and carries the primary responsibility for the services provided, it carries any risk associated with the service before transfer, and that it has complete discretion to set the prices it offers to end customers.
Click here to read the SEC’s correspondence with GMTech
Peloton
In a 2024 comment letter to Peloton, a fitness hardware and software company, the SEC asked for further justification on why the company was reporting gross extended warranty revenues instead of net since it uses a third-party “service contract obligor” in fulfilling warranty obligations. The company justified its position using the control framework in ASC 606-10-55-39 by explaining that it is primarily responsible for handling customer claims, has inventory risk for replacement parts, and can set the price of the warranty contract.
Click here to read the SEC’s correspondence with Peloton
As seen in the examples above, the SEC wants registrants to have strong reasoning for their judgments related to recognizing revenue gross vs. net. Registrants should be prepared to properly justify their assumptions and decisions using analysis such as that found in ASC 606-10-55-36 through 55-39.
Disaggregation of Revenues Disclosures
ASC 606-10-50-5 requires revenues to be disaggregated in a way that shows how economic factors affect revenue in terms of its nature, timing, and uncertainty.4 Implementation guidance in ASC 606-10-55-89 through 55-91 provides examples and factors to consider when choosing disaggregation categories.5 The guidance also provides example categories, such as type of good or service, geography, and contract duration. Additionally, it specifically notes that public companies should consider how revenue is disclosed outside of the financial statements, such as in investor earnings presentations. However, it does not prescribe exact rules for each type of entity or industry. Helpful resources for companies to use for further guidance include Big Four accounting firm guides and other resources such as the BYU RevenueHub case studies, which provide in-depth practical examples.
In 2025, electronic payment company PayPal had an exchange with the SEC where the SEC questioned PayPal’s disaggregation of revenue. The SEC wanted to know why PayPal was not disaggregating revenue on a product-specific basis when it was sometimes disclosing product-level revenue in investor presentations and earnings calls, which under ASC 606-10-55-90a must be considered when determining disaggregation categories. Additionally, the SEC brought up the different trends seen in revenues of different PayPal transaction products and wanted to know if this was not evidence of product revenues being affected differently by economic factors (ASC 606-10-50-5).
PayPal responded that its transaction revenue products share similar economic characteristics and are primarily influenced by management’s strategic decisions, not differing economic factors. The company explained that the product-specific revenues it provides outside of the financial statements are meant to give context to consolidated results or comply with Regulation S-K Item 303. PayPal emphasized that it does not plan to consistently provide product-level revenue amounts for all products and does not believe the nature, timing, or uncertainty of cash flows differs materially across products. It concluded that additional disaggregation was not required but stated it would update disclosures if meaningful differences arose.
This example demonstrates that registrants should carefully consider how they present disaggregated revenue across various settings and expect that the SEC will want to know why any discrepancies exist between the financial statement footnotes and other public presentations.
Click here to read the SEC’s correspondence with PayPal
Remaining Performance Obligation Disclosures
At the end of any given reporting period, it is possible for a company not to have completely fulfilled all outstanding performance obligations from its contracts with customers. To help investors see how much revenue will be recognized from the fulfillment of performance obligations in future periods, the FASB included ASC 606-10-50-13.4 This paragraph requires public entities to disclose the amount of the transaction price that is allocated to unfulfilled performance obligations at the end of each reporting period, using either qualitative or quantitative methods. See this article for more information about remaining performance obligation disclosures.
In a 2024 comment letter exchange, the SEC questioned equipment manufacturer NOV Inc.’s disclosure that it expected to recognize approximately $1.5 billion of revenue from unsatisfied or partially unsatisfied performance obligations over the next 12 months, with the remaining $3 billion to be recognized “thereafter.”
The Staff felt this disclosure did not provide adequate detail around the timing of revenue recognition for the remaining balance and requested NOV to disclose when the remaining performance obligations would be recognized using quantitative time bands or additional qualitative information in accordance with ASC 606-10-50-13(b).
In response, NOV revised its disclosures to break out the transaction price amounts expected to be recognized in 2024, 2025, 2026, and thereafter. This exchange demonstrates the SEC’s focus on ensuring remaining performance obligation disclosures provide investors with clear, decision-useful information about the timing of future revenue.
Click here to read the SEC’s correspondence with NOV
Variable Consideration
Variable consideration exists when part of the transaction price in a contract can change depending on future events. This includes discounts, rebates, price concessions, refunds, returns, credits, performance bonuses, penalties, usage-based fees, and amounts contingent on hitting milestones or future conditions. ASC 606-10-32-11 through 32-13 requires companies to estimate the amount of variable consideration and include it in the transaction price as long as it is probable that a significant revenue reversal will not occur.7 The two methods of estimating variable consideration are using the expected value (a probability-weighted average of possible outcomes) and most likely amount (the most likely outcome in a range of possible outcomes). Read this article to learn more about variable consideration and these two estimation methods.
Examples: Progyny and Cardiff Lexington Corporation
Progyny
In a 2024 comment letter, the SEC asked Progyny, a fertility and family planning benefits provider, to expand its disclosures related to variable consideration, noting that the company’s revenues included performance-based fees and usage-based amounts that depend on future employee utilization. The SEC questioned how Progyny estimated these variable amounts, how it assessed whether a constraint was necessary under ASC 606-10-32-11 through 32-13, and why a significant revenue reversal was not probable.
Progyny responded that it uses the most-likely-amount method to estimate its variable fees based on extensive historical experience with predictable utilization patterns across its customer base. The company explained that revenue reversals are unlikely because its data shows a consistent history of accurate estimates. Progyny also emphasized that its customers (primarily large employers and health plans) have a strong credit profile, making collectability probable. The company did, however, state that it would enhance future disclosures to more clearly describe its estimation methods, significant judgments, and constraint assessments.
To prepare for or avoid letters such as this, registrants should consider how the SEC might view their judgments about variable consideration and possible revenue reversal and ensure that applicable factors are clearly documented and communicated in disclosures.
Click here to read the SEC’s correspondence with Progyny
Cardiff Lexington Corporation
Cardiff Lexington Corporation operates a healthcare services business that earns fees from medical services subject to insurance reimbursement, negotiated settlements, and contractual adjustments. In a 2024 SEC correspondence, the staff focused on whether the company appropriately identified, measured, and disclosed variable consideration under ASC 606, especially when management accepted lower settlement amounts to receive payments more quickly.
The SEC noted that Cardiff Lexington had previously misclassified its acceptance of lower amounts to receive payment sooner as bad debt expense under ASC 326. The company later concluded that this acceptance constituted a price concession and should be accounted for as variable consideration, resulting in a reduction of revenue rather than an increase in credit loss expense. The company restated its financial statements to reclassify approximately $1.2 million of previously recorded bad debt expense as variable consideration under ASC 606.
The staff wanted clearer disclosures that distinguished between estimating variable consideration as part of the transaction price under ASC 606 and assessing collectability and credit losses under ASC 326. In response, the company expanded its revenue recognition disclosures to describe the forms of variable consideration, the use of the expected value method, and why its estimates were not constrained. This example highlights the SEC’s expectation that reductions driven by pricing or settlement decisions be treated as variable consideration rather than credit losses, and that these differences should be clearly explained to investors.
Click here to read the SEC’s correspondence with Cardiff Lexington Corporation
Noncash Consideration
ASC 606-10-32-21 through 32-24 discusses how to determine the transaction price in contracts where the company expects to receive consideration other than cash.8 In these situations, the FASB’s guidance dictates that companies measure the consideration at its fair value at contract inception. Any later changes to the fair value of the consideration may only be recognized in revenue if they are not due to the form of the consideration (changes in stock price, crypto value, etc.). For more information, see this article on noncash consideration.
In a 2024 comment exchange, the SEC questioned digital currency platform Exodus Movement’s accounting policy for noncash consideration, specifically its disclosure stating that noncash consideration was measured when payment was received rather than at contract inception. The SEC asked the company to identify the authoritative guidance supporting this approach and directed the company to ASC 606-10-32-21, which requires noncash consideration to be measured at fair value at contract inception. The SEC also cited ASC 606-10-32-23, which states that subsequent changes in the fair value of noncash consideration due to the form of the consideration (such as market price fluctuations) should not be included in the transaction price.
Exodus Movement clarified and revised its revenue recognition disclosures to align with ASC 606. The company explained that it measures its noncash consideration at fair value at contract inception and that it correctly excludes from revenue any changes in fair value attributable to the form of the consideration (for example, changes in the price of crypto assets). The company further explained that it evaluates changes in fair value arising from factors other than the form of the consideration separately as variable consideration. The company also noted that changes in the fair value of noncash consideration between revenue recognition and receipt of payment were not material because payment was usually received within a very short period.
This exchange highlights the SEC’s focus on ensuring that revenue reflects the value of consideration at contract inception and is not affected by subsequent market-driven changes unrelated to an entity’s performance under the contract.
Click here to read the SEC’s correspondence with Exodus Movement
Key Considerations for SEC Registrants
The SEC comment letters discussed above highlight that issues with revenue recognition under ASC 606 often stem from management’s failure to clearly explain the judgments and conclusions underlying their disclosures. Given the principle-based nature of ASC 606, the SEC continues to focus on whether disclosures provide investors with enough insight into how revenue is recognized, measured, and expected to be recognized in future periods.
Based on recent comment letters, registrants should consider the following when evaluating their revenue disclosures:
| Focus Area |
SEC Expectation |
| Consistency between financial statements and other investor communications |
Revenue breakdowns presented in earnings calls, investor presentations, or MD&A may inform the SEC of what revenue categories should be disaggregated in the footnotes. |
| Disclosure of significant judgments |
Principal vs. agent conclusions, variable consideration estimates, and remaining performance obligations require clear explanations of the underlying assumptions and rationale. |
| Revenue recognition timing information |
When remaining performance obligations are material, the SEC wants to see when the company expects to recognize the related revenue. |
| Consistent measurement for noncash consideration |
When measuring noncash consideration, registrants should clearly distinguish between changes in fair value driven by performance versus by market factors. |
| Frequent reassessment of disclosures |
Even if current disclosures are appropriate, evolving business models, pricing structures, or economic conditions may require different disaggregation or further explanation in future periods. |
Ultimately, companies that proactively address these issues in revenue disclosures can help reduce the likelihood of SEC comments while also improving the quality of their financial reporting. As revenue arrangements continue to grow in complexity, registrants that clearly articulate how ASC 606 applies to their specific facts and circumstances will be better positioned to meet both regulatory expectations and investor needs.
References
1. EY SEC Reporting Update, Highlights of trends in 2025 SEC staff comment letters; PwC Viewpoint, SEC comment letter trends
2. ASC 606-10-55-36 through 55-39
3. ASC 606-10-55-39
4. ASC 606-10-50-5
5. ASC 606-10-55-89 through 55-91
6. ASC 606-10-50-13
7. ASC 606-10-32-11 through 32-13
8. ASC 606-10-32-21 through 32-24
Other Resources Consulted
PwC Viewpoint 33.4, Revenue Disclosures
ASC 606, Revenue from Contracts with Customers
.jpg)
