ASC 606 revenue recognition memo with AI: contract review and five-step draft

When to use it

Use it for non-standard deals that deal desk or sales sends to accounting: bundles of software, services and hardware; usage-based or tiered pricing; customer acceptance clauses; termination for convenience; rebates and credits; contract modifications. It's also useful for spotting the non-standard terms buried in a 40-page MSA.

Input data

• Executed contract documents: MSA, order form(s), SOWs, amendments, side letters (ask sales whether any exist).
• Your revenue policy and existing memos for similar arrangements.
• Standalone selling price (SSP) analysis or price lists.
• Facts about the deal that aren't in the contract (e.g. implementation is commonly done by third parties; historical concessions).

The prompt

Replace the [bracketed] items. Paste it with your files attached. It works in any capable assistant; tool-specific notes are in the steps.

You are helping me analyze a customer arrangement under ASC 606 for [entity]. I am responsible for conclusions; you prepare a draft.

Attached: [MSA, order form(s), SOWs, amendments]. Our relevant policy: [paste or attach]. SSP information: [attach or "not provided"]. Additional facts: [bullets].

PART 1 – Contract term extraction (quote the language and cite document/section; write NOT FOUND if absent):
- Parties, term, effective date, renewal, termination rights (for cause / for convenience, by whom, penalties)
- Each promised good or service (licenses, SaaS access, implementation, training, support, hardware, credits)
- Pricing: fixed fees, usage/variable fees, tiers, minimums, discounts, rebates, credits, SLAs and penalties, price concessions, most-favored-nation clauses
- Payment terms, prepayments, extended terms (possible financing component)
- Acceptance clauses, refund rights, warranties beyond standard
- Options for additional goods/services at a discount (possible material rights)
- Third parties involved in delivery (principal vs agent questions)
- Any non-standard term compared with our standard contract

PART 2 – Five-step draft. Lay out the facts and the questions. Mark judgments "[JUDGMENT – preparer to conclude]".
Step 1: Contract existence criteria (ASC 606-10-25-1), including collectibility; the enforceable contract term given termination rights
Step 2: Performance obligations: for each promise, is it capable of being distinct and distinct in the context of the contract? Note any integration, significant modification or interdependence
Step 3: Transaction price: fixed vs variable consideration, estimation method (expected value or most likely amount), the constraint, significant financing component, consideration payable to the customer
Step 4: Allocation on a relative SSP basis; note how SSP is supported and whether any discount or variable consideration should be allocated to specific obligations
Step 5: Timing: over time (which criterion in ASC 606-10-25-27 might apply, and the measure of progress) or point in time (indicators of transfer of control)
Also: contract costs (ASC 340-40 – commissions), and disclosure data points (remaining performance obligations, contract balances)

PART 3 – Open questions to send to sales, legal or the customer team.

List any ASC citations separately under "Citations to verify". Do not invent paragraph references.

Steps

1. Get the complete contract set, and ask the account owner directly about side letters and email commitments.
2. Run Part 1 and check every extracted term against the cited section.
3. Run Part 2. Answer each judgment yourself, referencing your policy and precedent memos.
4. Get SSP support and any calculations (allocation, variable consideration estimates) from your models, not the chat.
5. Send the Part 3 questions to sales or legal and update the memo with the answers.
6. Technical review and approval per policy, then set up the contract in your billing or revenue system to match the memo.

Control map

What the AI may do, step by step. How ratings work.

Audit trail

• File the contract documents, the AI extraction (with citations), the final memo and the review evidence together.
• Keep answers to the open questions (emails from sales or legal) as support.
• Revenue memos are commonly requested by auditors. The reasoning must be the preparer's, consistent with policy and precedent.

Failure modes

• Missing documents. The AI can only analyze what it was given; side letters are the classic miss.
• Over-splitting or under-splitting performance obligations using generic logic rather than your facts (e.g. whether implementation significantly modifies the software).
• Treating termination-for-convenience language too lightly. It can shorten the enforceable contract term.
• Fabricated citations, or citations of superseded guidance. Verify against the Codification.
• Confident numbers. Don't use AI-computed allocations; recompute in your model.

Data handling

• Use a company-approved AI workspace whose terms say your inputs are not used for model training. Check your plan; don't assume it.
• Strip or mask what the task doesn't need: employee names, bank account numbers, customer PII, SSNs or TINs.
• If you are a public company, treat pre-release results as material non-public information and keep them inside approved systems.