Shadowing Practice: Revenue Recognition ASC 606. Step 1: Identify the Contract. - Learn English Speaking with Video

Hello and welcome to the session in which we would look at revenue recognition.

What is revenue recognition?

Revenue recognition is when do we recognize revenue?

When do we record revenue?

Revenue is one of the most important figures for companies.

Revenue drives everything else on the financial statements.

It's called the top line for a reason.

It is the top line and it's the most important.

It drives your earnings before interest and taxes.

It drives your earnings per share, exist without revenue or they might be able to exist for a short period of time,

very short period of time, if the investors kept investing money.

But without revenue, you can't have a profit.

Without revenues, you should not be incurring any expenses.

So revenue is important.

And in the real world, revenue is subject to fraud.

So that's why revenue recognition is important.

GAAP had numerous standards in the past, and this is, I'm going to give you a little bit of background information, over 100 standards for revenue recognitions, and some of them were inconsistent with each other.

That's in the U .S.

Globally, IFRS had only one general standard and some limited guidance.

So what they decided to do, they decided to combine and create one set of revenue recognition for both U .S and IFRS.

contract with customers and the key word is contract we need to talk a little bit more about contract.

So the purpose of this convergence is to improve comparability across countries,

companies, industries, because if investors wants to learn about Sony's revenue,

it should be easy to read Sony's financial statement or if you want to learn about a European company, Adidas or a US company, it should be all the same in how they recognize revenue.

The purpose also is to simplify the preparation of financial statement and also help the users understand how revenue is recognized.

Specifically, they used something called the asset liability approach.

And this approach said that revenue is driven by measurement of assets and liabilities arising from the contract.

So basically what they said, when we need to recognize revenue, look at the contract and see how the contract is changing the assets of the company.

For example, account receivable, do you have,

do you expect, you have a legal expectation because of this contract.

So this is what they said.

The contract will drive this asset liability, what's called asset liability approach.

So revenue is driven by how the contract is changing your assets and your liabilities.

Specifically, they have five steps of revenue recognition.

And to illustrate those five steps, I'm going to just work a simple example, but those five steps will be covered in details later on.

In this session, I will cover one step of them,

and that's So let's assume Tesla entered into a contract to sell the Model Y for 75 ,000.

This is the Model Y to be delivered 60 days from today.

First thing is that we have a contract.

Well, the answer is yes, we have a contract.

Maybe the customer went online to Tesla and input the information, and that's the contract.

Or maybe the customer walked into Tesla's dealership in one of the malls in the US and signed some paperwork.

So somehow there is a contract.

Does it have to be in writing?

We'll talk about the contract later on on the next slide.

But the point is there is a contract.

There is an agreement between a buyer and Tesla.

That's the first thing.

The second thing is the contract will have to identify the separate performance obligation in the contract.

Now for the sake of simplicity, there's only one performance obligation and that is what?

Tesla has to deliver the car to the customer.

That's it.

So identify the separate there's only one because we're keeping this example simple.

One obligation and that's to deliver the car.

Now if we for example

if Tesla will would want to sell a maintenance agreement on the vehicle then that will be a separate

separate performance obligation

but here we're assuming one obligation step three in the count

in the in the revenue recognition five step process is determine

the transaction price that's easy the transaction price is 75 000

we're going to have a whole session about determining the transaction price

which is because it's sometime it's not as straightforward

or simple then we're going to allocate once we determine the

price once we determine the price we're going to allocate the

price to the to the up to the obligation to the separate performance obligation One thing here, one price, one obligation, it's easy.

So the 75 ,000 is toward the car.

And Tesla would recognize revenue when each performance obligation is satisfied.

They only have one and that one is to deliver the car.

So revenue is recognized when Tesla performed the obligation.

And when does Tesla perform the obligation?

They're hoping 60 days from today they will perform the obligation.

and cover step one I would like to remind you whether you are a student

or a CPA candidate to take a look at my website farhatlectures .com my motto is saving CPA candidate

and accounting students one at a time by providing new resources

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So let's now dive a little bit more into step one, identify the contract with customer.

Well, what is a contract?

That's the first thing we need to know.

Well, it's an agreement that create enforceable rights and obligation.

Two parties agree to the contract.

You cannot have a contract with one party agreeing if the other party don't agree.

If you want to sell me something, you send me a contract.

Well, you send me the contract.

You signed it.

Well, if I didn't sign the contract, there is no agreement.

So it has to be by both parties.

And the contract doesn't have to be in writing.

If it's in writing, it's helpful, it's good, it's better to have a contract in writing, but sometimes it's not feasible to have a contract in writing.

Because let's assume you want to buy something from the store, you walk into the store, you pick it up from the shelves, you walk, to the register and you buy it.

You don't need a contract to do that.

So basically, or you don't even have to talk to anyone.

For example, if you pick up something at the supermarket, sometime you have what's called the self -checkout.

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You check it out yourself.

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That's also a contract.

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You're taking the item.

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you're paying for it so the contract is implied sometimes the contract is oral

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if two individual agree and that could be two car dealer car dealerships

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or any two individuals can agree to buy and sell

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and as long as they trust each other it's an oral contract

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or sometimes it's the contract is customary for example

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when your inventory reaches a certain level i send you the

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product i don't have to talk to you this is customary in the industry

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because you need the product and you are relying on me so the contract doesn't have to be in writing

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it can be implied so

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but the point is you have to have some sort of a contract this is the foundation

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if you don't have a contract whether it's in writing

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or implied you don't have revenue

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because you need something okay the contract should also have five

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additional criteria we're going to go over these criteria separately one

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is commercial substance commercial substance sometimes it's called you know a protective clause not to inflate revenue simply put

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when you go into a contract with

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actual business transaction

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and you're not only shuffling papers to inflate your revenue simply

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put I would say okay let's do this let's sign this contract for this period

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and I will sell you the stuff right and next period I will buy it back no

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What you did is you inflated your revenue and you're buying back the product.

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Well, it has to have an actual business reason, not shuffling papers.

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It has to have business sense, economic substance.

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We are entering into a transaction because there's a benefit for you

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and a benefit for me in a sense that it's a business benefit.

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Both parties, as I told you, have to approve the contract.

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Otherwise, the contract is not enforceable.

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And we talked about this.

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Also, you cannot have a termination clause that you can easily exit.

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If we have a contract and you can easily exit, there are no consequences for breaking the contract.

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You really have no contract because you can at any point leave, exit.

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There is no real or true contract.

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payment later on there's one whole section about how to determine

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the payment you have to have enough information to determine the price

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or be able to estimate the price on the contract

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if it's easy like in our contract with tesla that's fine okay

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or for example let me just kind of make this little bit more interesting for example

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when you bought this tesla tesla would say look

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if our stock price above a thousand dollar okay we're gonna reduce five percent of your of your selling

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$75 ,000 then well if the stock price of Tesla on the day

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that we sell it to you we're going to give you a 5 % discount.

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Well, we could, it's not fixed, it's not specific, but I just made up this example just to tell you, it doesn't have to be specific.

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We'll talk about that later on, but this is just a fictitious example.

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Also the contract will hide will have to identify rights to goods and services.

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Exactly what am I getting?

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What am I paying for it?

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What am I getting?

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Okay, I know what I'm paying for.

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I know how much I'm paying, but what am I getting in return?

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You have to identify what am I getting.

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Also, collectability.

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If you cannot collect the money from a contract, you're basically a charity.

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That's not really a true contract.

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Now, sometimes you may enter into a contract and collectability from that person is susceptible because they're really shaky, but you still want to make the sale because they might...

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pay you.

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Under those circumstances when collectability is susceptible, you're not really sure, but you want to take your chance, then you would use cash basis accounting.

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And what's cash basis accounting?

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You wait until you get paid, and this is where you really recognize the revenue.

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You would use cash basis not accrual basis not what we are learning here.

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Now, what should you do now?

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The best way to learn more about this is to go to my website, farhatlectures .com, and work MCQs,

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work true -false questions, look at exercises that's going to help you reinforce the concept.

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In the next session, we're going to be looking at step two in the contract, and that is after we have a contract,

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we have to know what are the obligation, the performance obligation in the contract,

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and we'll have a one session about performance determining the price, so on and so forth.

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Invest in yourself, invest in your career.

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Don't shortchange yourself.

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Go to Farhat, subscribe.

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try it for a month you like it you keep it

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if it's helping you if not you let it go good luck study hard and of course stay safe

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Vocabulary and speaking notes for this lesson

This video has 172 sentences and 2035 words to shadow. The speech runs for 11:24. The speaker talks at a natural 179 words per minute, close to everyday conversation. 86% of the words are among the 3,000 most common in English; the rest is worth studying before you start.

Key vocabulary in this video

15 words from the video worth learning, with pronunciation and meaning:

Word	Pronunciation	Meaning
obligation noun	/ˌɑ.blɪˈɡeɪ.ʃn̩/	The act of binding oneself by a social, legal, or moral tie to someone.
tesla noun	/ˈtɛslə/	In the International System of Units, the derived unit of magnetic flux density or magnetic inductivity.
recognition noun	/ˌɹɛkəɡˈnɪʃ(ə)n/	The act of recognizing or the condition of being recognized (matching a current observation with a memory of a prior observation of the same entity).
asset noun	/ˈæsɛt/	A thing or quality that has value, especially one that generates cash flows.
transaction noun	/tɹænˈzækʃən/	The act of conducting or carrying out (business, negotiations, plans).
liability noun	/laɪəˈbɪlɪti/	An obligation, debt or responsibility owed to someone.
exit noun	/ˈɛɡzət/	An act of going out or going away, or leaving; a departure.
invest verb	/ɪnˈvɛst/	To spend money, time, or energy on something, especially for some benefit or purpose; used with in.
substance noun	/ˈsʌbstəns/	Physical matter; material.
imply verb	/ɪmˈplaɪ/	To have as a necessary consequence; to lead to (something) as a consequence.
connect verb	/kəˈnɛkt/	To join (to another object): to attach, or to be intended to attach or capable of attaching, to another object.
earnings noun		Wages, money earned, income.
oral adjective	/ˈɔː.ɹəl/	Relating to the mouth.
sometime adverb	/ˈsʌmˌtaɪm/	At an indefinite but stated time in the past or future.
clause noun	/klɔːz/	A group of words that contains a subject and a verb; it may be part of a sentence or may constitute the whole sentence, depending on the syntax in each…

Phrasal verbs you will hear

Word	Pronunciation	Meaning
buy back verb		To purchase (something already sold, misplaced, destroyed, or given away).
go over verb		To look at carefully; to scrutinize; to analyze.
make up verb	/ˌmeɪk ˈʌp/	To constitute, to compose.
pick up verb		To lift; to grasp and raise.

Pronunciation to watch

The speaker uses 40 contractions and reduced forms, such as we're, don't, I'm. Say them the short way, as you hear them.

The “sh” and “zh” sounds: obligation /ˌɑ.blɪˈɡeɪ.ʃn̩/, recognition /ˌɹɛkəɡˈnɪʃ(ə)n/, transaction /tɹænˈzækʃən/, preparation /ˌpɹɛpəˈɹeɪʃ(ə)n/, partial /ˈpɑɹʃəl/
Long words — get the stress right: recognition /ˌɹɛkəɡˈnɪʃ(ə)n/, liability /laɪəˈbɪlɪti/, customary /ˈkʌs.təˌmɛɹ.i/, preparation /ˌpɹɛpəˈɹeɪʃ(ə)n/, recommendation /ˌɹɛkəmɛnˈdeɪʃən/

How to practise with this video

Listen to the whole video once without speaking and note the words you do not know.
Start at 0.75× speed, shadow it sentence by sentence, then go back to normal speed once it feels easy.
Record yourself and compare with the original, paying attention to words like obligation, tesla, recognition.

What is the Shadowing Technique?

Shadowing is a science-backed language learning technique originally developed for professional interpreter training and popularized by polyglot Dr. Alexander Arguelles. The method is simple but powerful: you listen to native English audio and immediately repeat it out loud — like a shadow following the speaker with just a 1–2 second delay. Unlike passive listening or grammar drills, shadowing forces your brain and mouth muscles to simultaneously process and reproduce real speech patterns. Research shows it significantly improves pronunciation accuracy, intonation, rhythm, connected speech, listening comprehension, and speaking fluency — making it one of the most effective methods for IELTS Speaking preparation and real-world English communication.

Shadowing technique: read the full step-by-step guide →

Shadowing Practice: Revenue Recognition ASC 606. Step 1: Identify the Contract. - Learn English Speaking with Video

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Vocabulary and speaking notes for this lesson

Key vocabulary in this video

Phrasal verbs you will hear

Pronunciation to watch

How to practise with this video

What is the Shadowing Technique?