ASC 606 / IFRS 15: Seven Tests for Transfer of Control to The Customer

Seven tests for transfer of control to the customer under ASC 606 / IFRS 15.

The new revenue recognition standard says revenue is recognized when control of a promised good or service transfers to the customer (not just when risks/rewards pass, as under the old standard).

To evaluate whether control has passed, ASC 606 provides indicators (often called the seven tests or indicators of transfer to customer).

🔹 The Seven Indicators of Transfer to Customer (Control)

An entity should consider whether the customer has obtained control by assessing the following:

1. Present right to payment
   • If the entity has a right to payment for the asset/service, it’s a strong indicator control has passed.
   • Example: A construction firm finishes a building wing; the client must pay for work done so far.
2. Legal title has passed
   • If ownership/title is transferred, usually control has too.
   • Example: Car dealership transfers vehicle title to customer.
3. Physical possession has transferred
   • When the customer physically has the goods, that’s an indicator of control.
   • Example: Delivery of furniture to customer’s home.
4. Significant risks and rewards of ownership have transferred
   • While the new model focuses on control, risks/rewards are still a useful indicator.
   • Example: Once an airline delivers an aircraft, the airline is no longer responsible for insurance risk.
5. Customer has accepted the asset
   • If the contract requires formal acceptance and it’s obtained, control likely has transferred.
   • Example: Software implementation signed off by customer after testing.
6. Customer has significant control over the asset’s use
   • If the customer can direct how and for what purpose the asset is used, they likely control it.
   • Example: Buyer gets a machine and can start using it in operations immediately.
7. Customer can prevent others from directing the asset’s use or deriving benefits
   • If others can’t use/benefit from it without the customer’s say-so, then control has passed.
   • Example: Exclusive software license transferred to a client.

📝 Key Point

Not all seven indicators need to be met. They are factors to consider in assessing whether control has passed — judgment is required depending on the nature of the good or service.

• If enough of these indicators are met → control has transferred → revenue can be recognized.
• If not → revenue recognition must wait until control passes.

A comparison table showing how these 7 indicators apply differently in goods vs services vs subscriptions?

📊 Comparison of 7 Indicators of Transfer of Control

Indicator	Goods (e.g., laptops, furniture)	Services (e.g., consulting, cleaning, construction)	Subscriptions (e.g., SaaS, streaming, telecom)
1. Present right to payment	Customer owes payment once goods are delivered.	Payment often tied to milestones or hours worked.	Payment is typically periodic (monthly/annual). Revenue recognized over time as service delivered.
2. Transfer of legal title	Title passes at delivery or shipping terms (FOB).	Usually not relevant (services don’t have legal title).	Not relevant for digital/ongoing access; control tied to access rights.
3. Transfer of physical possession	Customer physically receives the product.	Not applicable (service is intangible).	Customer gains access credentials (login, subscription activation).
4. Risks and rewards of ownership	Once delivered, customer bears risks (e.g., damage, loss).	Not directly applicable; risk is that service is not performed.	Customer bears risk of usage (e.g., subscription wasted if unused).
5. Customer acceptance	Explicit acceptance sometimes needed (e.g., machinery installation).	Often formal sign-off required (e.g., consulting project).	Acceptance implicit in activation/use of subscription.
6. Customer can direct use of asset	Customer can use/sell the product freely after delivery.	Customer decides how/when to use the service outputs.	Customer controls usage (streaming content, SaaS features).
7. Customer can restrict others from use	Customer owns the good and can exclude others from it.	Work product (e.g., custom report) can’t be used by others once delivered.	Subscription gives exclusive access to account/services.

🔑 Key Insights

• Goods → Often recognized at a point in time (when delivery occurs, title passes, and control indicators are met).
• Services → Frequently recognized over time (as service is performed, especially if customer benefits as work progresses).
• Subscriptions → Recognized ratably over time (because access is continuous and control transfers evenly across the subscription period).

👉 This table is a great quick-reference when clients ask:

• “When exactly can we recognize revenue for our business model?”
• You’ll map their business process against these 7 indicators and justify the timing of recognition.