An audit shouldn’t feel like a final exam you didn’t study for. With the right preparation, it can be a smooth and straightforward process that validates the strength of your financial reporting. For SaaS companies, the key is a deep understanding of how the five-step revenue recognition model applies to your unique business. From handling multi-year subscriptions to allocating revenue for bundled professional services, every decision needs to be documented and justified. This guide is your study guide. We’ll cover the common challenges, the documentation you need, and the questions to anticipate, ensuring you have everything in order to meet the ASC 606 audit requirements for SaaS and pass with flying colors.
Key Takeaways
- Match Revenue to Service Delivery: ASC 606 requires you to recognize revenue as you fulfill specific promises in your customer contracts. This means breaking down bundled services and aligning your financial reporting with the actual value you provide over time.
- Apply the Five-Step Model for Consistency: Use the standard’s five-step framework as your roadmap for every contract. This systematic process ensures you consistently identify obligations, determine pricing, and allocate revenue, creating a reliable and audit-proof system.
- Establish Strong Systems and Controls: Go beyond spreadsheets by creating clear revenue policies, maintaining meticulous contract documentation, and using automation tools. A solid internal framework with the right software reduces errors and provides the transparent audit trail auditors require.
What is ASC 606 and Why Does It Matter for SaaS?
If you run a SaaS company, you’ve likely heard about ASC 606. Think of it as the universal rulebook for how and when you can count the money you earn from customers. Officially known as “Revenue from Contracts with Customers,” this standard applies to all businesses, but it’s a particularly big deal for the SaaS world. Why? Because SaaS contracts are often complex, involving subscriptions, tiered pricing, usage fees, and multi-year deals. Before ASC 606, the rules were a bit murky, leading to inconsistencies in how different companies reported their revenue, making it difficult to compare one company’s performance to another.
This standard was created to clear things up, providing a single, comprehensive framework for revenue recognition across all industries. For SaaS businesses, this means changing how you account for everything from initial setup fees to monthly subscription payments. The core idea is that you should recognize revenue only when you’ve actually delivered the promised goods or services to your customer. Getting this right isn’t just about compliance; it’s about presenting an accurate picture of your company’s financial health to investors, stakeholders, and auditors. Understanding these rules is the first step toward a smooth and successful audit and building trust in your financial statements.
The Five-Step Revenue Recognition Model
To apply ASC 606 correctly, you need to follow a specific five-step process for every customer contract. It might sound intimidating, but breaking it down makes it much more manageable. This model ensures you recognize revenue in a way that truly reflects the value you’ve provided to your customer over time.
Here are the five steps every SaaS company needs to follow:
- Identify the contract with a customer: This is the starting point—a formal agreement that outlines what you’ll provide and what they’ll pay.
- Identify the performance obligations: What distinct services have you promised to deliver? This could be software access, customer support, or implementation services.
- Determine the transaction price: This is the total amount you expect to receive from the customer for the entire contract.
- Allocate the transaction price: Divide the total price among the different performance obligations you identified in step two.
- Recognize revenue: Record the revenue as you satisfy each performance obligation.
How ASC 606 Affects SaaS Business Models
The biggest shift for SaaS companies under ASC 606 is the move away from recognizing revenue all at once. Instead, the standard requires you to recognize revenue over the lifetime of a subscription. This better reflects the ongoing nature of the service you provide. For example, if a customer signs a 12-month contract for $12,000, you can’t book all $12,000 in the first month. You have to recognize $1,000 each month as you deliver the service. This applies to other fees as well, like setup or training fees, which often need to be deferred and recognized over the contract term. This change provides a more stable and predictable view of your company’s financial performance.
Key Changes Every Software Company Should Know
The introduction of ASC 606 has had a more significant impact on software and SaaS companies than almost any other industry. The fundamental change is the principle of recognizing revenue when control of a service is transferred to the customer, in an amount that reflects what you expect to receive. This means you have to look closely at your contracts to determine what you’ve promised and when you’ve delivered on those promises. Things like sales commissions, which were once expensed immediately, may now need to be capitalized and amortized over the contract’s life. If this all sounds complex, don’t worry—getting expert guidance can make all the difference. Our team at GuzmanGray can help you put these principles into practice.
Your Essential ASC 606 Audit Checklist
Navigating an ASC 606 audit comes down to having a clear, systematic approach. Think of it as a roadmap that follows the five core steps of the revenue recognition standard. By breaking down the process, you can ensure every contract is accounted for correctly and that your financial statements are audit-ready. This checklist will walk you through each step, helping you build a solid foundation for compliance and giving you the confidence to face any audit questions that come your way. Let’s get your records in order.
Identify and Document Contracts
The first step is to pinpoint every agreement you have with a customer. Under ASC 606, a “contract” is any agreement that creates enforceable rights and obligations—it doesn’t have to be a formal, signed document. It could be a combination of a master service agreement and a statement of work, or even just your standard online terms of service. The key is to document everything: the start and end dates, payment terms, and all services promised. This is especially important because ASC 606 requires SaaS companies to recognize revenue over the lifetime of a subscription, reflecting the ongoing service they provide. Your documentation is the evidence that supports this timeline.
Assess Performance Obligations
Next, you need to identify every distinct promise you’ve made to your customer within the contract. These are your “performance obligations.” For a SaaS business, this might include software access, customer support, implementation services, or training sessions. Each promise to deliver a distinct good or service is a separate obligation. To prepare for your audit, you must show that you have consistent and controlled methods for identifying these obligations and reallocating revenue based on their standalone selling price. This step is crucial for ensuring you don’t recognize revenue for bundled services prematurely.
Determine the Transaction Price
Once you know what you’ve promised, you need to figure out how much you expect to be paid for it. This is the transaction price. It might seem straightforward, but it can get tricky with variable considerations like discounts, rebates, usage-based fees, or credits. You need to estimate the total amount of revenue you’ll collect over the contract term. Remember, ASC 606 dictates that revenue should be recognized only after performance obligations are fulfilled, not when a customer first signs a contract. This means the transaction price is directly tied to the value you deliver, not just the invoice you send.
Allocate Revenue Correctly
With the transaction price and performance obligations defined, the next step is to allocate a portion of the total price to each separate obligation. This allocation should be based on the standalone selling price (SSP) of each item—what you would charge for that service if you sold it separately. If you offer a customer an option for future services at a significant discount, that option is often treated as a separate performance obligation with its own slice of the transaction price. Getting this allocation right is fundamental to recognizing revenue accurately over the life of the contract.
Define Revenue Recognition Timing
Finally, you determine when to recognize the revenue for each performance obligation. Revenue is recognized as you satisfy each promise—either at a single point in time (like a one-off training session) or over a period of time (like a monthly software subscription). The standard requires companies to recognize revenue when goods or services are transferred to their customers in amounts that reflect what they expect to receive. For most SaaS companies, this means recognizing subscription fees on a straight-line basis over the contract term. Your policies should clearly define this timing and be applied consistently across all similar contracts.
What Are Performance Obligations in SaaS?
Think of a performance obligation as a promise you make to your customer in a contract. For SaaS companies, a single contract often contains multiple promises. You might promise access to your software platform, but also initial setup services, data migration, employee training, and ongoing technical support. Under ASC 606, you can’t just look at the total contract value and recognize it smoothly over the term. Instead, you have to break the contract down into these individual promises, or performance obligations.
This process is fundamental to the entire five-step model of revenue recognition. Correctly identifying each distinct obligation is the only way to ensure you recognize the right amount of revenue at the right time. It forces you to look closely at what you’re truly delivering to the customer and when you’re delivering it. This is especially important for contracts that bundle multiple services, include variable fees based on usage, or change over time. Getting this step right sets the foundation for accurate, compliant financial reporting and a smooth audit.
Identify Distinct Obligations
The first step is to figure out which of your promises are “distinct.” A service is distinct if the customer can benefit from it on its own and it’s separately identifiable from other promises in the contract. For example, a software license is usually distinct because the customer can use the software without any other services. Implementation services or training might also be distinct if the customer could theoretically hire another firm to do them. The goal of ASC 606 is to recognize revenue when you transfer control of a good or service, and identifying distinct obligations is how you pinpoint exactly what is being transferred and when.
Handle Bundled Services and Pricing
SaaS contracts are famous for bundling. You might offer a package that includes the software license, standard support, and an initial onboarding session for a single monthly or annual fee. While this simplifies sales, it complicates accounting. Under ASC 606, you must “unbundle” these items for revenue recognition purposes. This means you have to allocate a portion of the total transaction price to each distinct performance obligation based on its standalone selling price. The good news is that the ASC 606 framework is designed to handle contracts with multiple performance obligations, making it a good fit for the typical SaaS business model once you establish a clear methodology.
Account for Variable Consideration
Does your pricing change based on usage, user count, or other factors? That’s called variable consideration, and you need to account for it. This includes things like tiered pricing, usage-based fees, discounts, rebates, or performance bonuses. ASC 606 requires you to estimate the amount of variable consideration you expect to receive and include it in the transaction price. For example, SaaS companies often have multi-year contracts with escalating prices. You must estimate the total transaction value from the outset, which can be a significant change from previous accounting standards that may have capped revenue at the non-contingent amount.
Manage Contract Modifications
Your relationship with a customer rarely stays static. They might upgrade their plan, add more users, or purchase a new service. These contract modifications need to be accounted for carefully. Depending on the nature of the change, a modification might be treated as a termination of the old contract and the creation of a new one, or as a cumulative catch-up adjustment to the original contract. Each scenario has a different impact on revenue recognition. Having a solid process for tracking modifications is critical, especially since ASC 606 requires more detailed financial statement disclosures about your contracts and performance obligations.
Establish Strong Documentation and Internal Controls
Having strong documentation and internal controls is the foundation of your ASC 606 compliance. Think of it as building the instruction manual and safety features for your revenue recognition process. It’s not just about satisfying auditors; it’s about creating a reliable, transparent system that produces accurate financial statements every time. When you can clearly show how you arrived at your numbers and that you have checks in place to ensure consistency, you build trust with auditors, investors, and stakeholders. This is where you prove that your revenue recognition isn’t guesswork—it’s a well-oiled machine.
Gather Required Contract Documentation
Your first step is to get organized. Every single customer contract, statement of work (SOW), amendment, and order form needs to be collected and stored in a central, accessible location. Since ASC 606 requires SaaS companies to recognize revenue over the lifetime of a subscription, the specific terms within these documents are critical. They dictate your performance obligations, transaction price, and contract duration. Create a system where you can easily pull up any contract and find the key terms that impact revenue. This isn’t just about storage; it’s about having the evidence you need at your fingertips to support your accounting decisions and demonstrate a clear, consistent process to auditors.
Develop Clear Revenue Recognition Policies
Once you have your documents, you need a playbook. Your revenue recognition policy is a formal document that explains exactly how your company applies ASC 606. It should detail your methods for identifying performance obligations, determining standalone selling prices (SSPs), and allocating revenue. To comply with the standard, you must show that you have consistent and controlled methods for these critical judgments. This policy ensures that everyone on your team handles similar contracts the same way, eliminating inconsistencies that can raise red flags during an audit. It’s your single source of truth for all things revenue and a key piece of evidence for your auditors.
Configure Your Systems for Compliance
Manual tracking in spreadsheets is risky and simply won’t scale as your business grows. You need to configure your accounting systems, like your ERP and CRM, to support ASC 606 requirements. The right technology can automate complex calculations, manage revenue schedules, and link directly to contract documentation. Using specialized ASC 606 software helps streamline the entire process, from contract inception to revenue recognition. This not only reduces the risk of human error but also provides the robust reporting and audit trails necessary for a smooth audit. It’s about building an infrastructure that supports compliance from the ground up.
Maintain a Detailed Audit Trail
An auditor will always ask, “How did you get this number?” A detailed audit trail is your answer. For every material judgment you make, you need to document the “why” and “how.” This includes memos explaining your rationale for SSP estimates, calculations for allocating transaction prices, and records of any contract modifications. ASC 606 requires more detailed disclosures in your financial statements, and your audit trail provides the backup for that information. It’s the story of your revenue, showing every step and decision made along the way and proving your process is both thoughtful and compliant.
Build a Solid Internal Control Framework
Finally, you need to implement checks and balances to ensure your policies are being followed correctly. A solid internal control framework might include requiring a secondary review of all new non-standard contracts, management approval for significant accounting judgments, and regular reconciliations of your revenue data. These controls are designed to catch errors before they become material misstatements. By building a strong framework, you create a system of accountability that reinforces your policies and ensures the integrity of your financial reporting. Our team provides assurance and tax accounting services to help you design and implement these crucial controls.
Find the Right Tools for ASC 606 Compliance
Trying to manage ASC 606 compliance with spreadsheets is a recipe for headaches and potential errors. The complexity of SaaS contracts, with their various performance obligations and modifications, demands a more robust solution. The right technology stack not only simplifies the process but also provides the accuracy and audit trail you need to feel confident in your numbers. Investing in the right tools from the start will save you countless hours and help you build a scalable financial foundation for your company.
Revenue Recognition Software
At its core, ASC 606 requires SaaS companies to recognize revenue as services are delivered over the lifetime of a subscription, not just when cash is collected. This is where dedicated software becomes a game-changer. Using specialized ASC 606 software helps automate and streamline this entire process, from contract inception to revenue scheduling. These platforms are designed to handle the nuances of SaaS billing, including prorated periods, upgrades, and downgrades, ensuring revenue is recognized accurately and consistently every single month. Think of it as your central hub for compliance, reducing manual work and the risk of human error.
Performance Obligation Trackers
Identifying and tracking individual performance obligations is one of the trickiest parts of ASC 606. Your contracts might include software access, implementation services, technical support, and training—all of which need to be accounted for separately. Many revenue recognition platforms include features to manage this. For example, a powerful revenue recognition module allows you to set specific rules for reallocating the total contract price across different performance obligations. This functionality automatically applies your policies to new contracts, ensuring every component is valued and recognized correctly without you having to manually intervene each time.
Reporting and Analytics Tools
Getting your revenue recognition right is one thing; being able to prove it is another. This is where reporting and analytics tools come in. These systems generate the detailed disclosures and financial statements required by auditors and stakeholders. Strong reporting capabilities are critical because they improve financial transparency by standardizing how you present revenue. This makes it much easier for investors and analysts to compare financial statements from different companies and industries. These tools give you a clear view of your deferred revenue, recognized revenue, and other key metrics, providing the data you need for both compliance and strategic decision-making.
Training and Education Resources
The best software in the world won’t help if your team doesn’t understand the principles behind it. Investing in ongoing training is essential for keeping your finance leaders and staff up to speed on the complexities of ASC 606. Look for resources that focus specifically on the challenges SaaS companies face. A course on SaaS revenue recognition essentials can provide critical insights on handling subscriptions, usage-based billing, professional services, and hardware revenue. Continuous education empowers your team to make informed judgments, correctly configure your systems, and confidently answer any questions that come up during an audit.
Avoid These Common Compliance Challenges
Getting ASC 606 right is a big step, but it’s not without its tricky spots. Many SaaS companies run into the same issues when applying the new standard. Knowing what these challenges are ahead of time can help you create a smoother, more efficient compliance process. From grappling with complex contracts to ensuring your financial statements tell the full story, let’s walk through the most common hurdles and how you can prepare for them. By anticipating these issues, you can build stronger internal controls and face your audit with confidence.
Estimating Variable Consideration
Variable consideration is any part of a transaction price that isn’t fixed, like discounts, rebates, or performance bonuses. For SaaS companies, this also includes things like usage-based fees or credits for service outages. Under ASC 606, you have to estimate this uncertain amount and include it in the transaction price. This requires making some careful guesses about future events, such as how many customers will earn a volume discount or whether you’ll meet a service-level agreement (SLA). The key is to use all available information to make a reasonable estimate, document your methodology, and update it as new information becomes available.
Managing Complex Contracts
SaaS contracts are rarely simple. They often involve multiple services, tiered pricing, and clauses that can change over several years. For example, a multi-year contract might have escalating prices, which can create confusion around how much revenue to recognize each year. Contingent revenue used to be a major factor, but ASC 606 changes how you approach these agreements. You now need to look at the entire contract term and the total expected payment to allocate revenue properly. This means your team needs a solid process for reviewing every contract, understanding its unique terms, and applying the five-step model consistently, no matter how complex the deal is.
Identifying All Performance Obligations
A performance obligation is a promise in a contract to deliver a distinct good or service to a customer. The challenge for SaaS businesses is that it’s not always easy to figure out exactly what services you’ve promised. Are implementation, training, and technical support separate obligations, or are they part of the core software subscription? Getting this wrong can throw off your entire revenue recognition model. You need to carefully analyze your contracts to identify each distinct promise and then allocate a portion of the transaction price to each one. This is especially tricky when services are bundled together for a single price.
Nailing Down Recognition Timing
The core principle of ASC 606 is to recognize revenue when you transfer control of a good or service to your customer. For SaaS, “transfer of control” usually happens over time as the customer uses your software. But it’s not always that straightforward. What about one-time setup fees or professional services? You need to determine if the customer benefits from these services as they are performed or only upon completion. This decision dictates whether you recognize revenue over time or at a single point. Establishing clear, consistent rules for timing is essential for accurate financial reporting and a successful audit.
Meeting Disclosure Requirements
ASC 606 isn’t just about changing how you recognize revenue; it’s also about being more transparent. The standard requires that your financial statements include more detailed information than ever before. You’ll need to disclose how your revenue is broken down (e.g., by product line or region), provide details about your contract balances, and explain the significant judgments you made when applying the standard. This means your accounting team needs to track more data and be prepared to present it clearly in your financial statement footnotes. It’s a good idea to create a disclosure checklist to ensure you don’t miss anything.
Build Your ASC 606 Compliance Strategy
Creating a solid compliance strategy is about more than just checking boxes; it’s about building a sustainable system that supports your company’s growth. A proactive approach ensures your financial reporting is consistently accurate, transparent, and ready for an audit at any time. By breaking down your strategy into clear, manageable steps, you can create a framework that works for your team and scales with your business. Think of it as building the financial scaffolding that will keep your revenue recognition process sturdy and reliable for years to come.
Develop Clear Policies
Your first step is to create and document clear revenue recognition policies. These aren’t just for your auditors; they’re the go-to guide for your finance team. For SaaS companies, ASC 606 requires you to recognize revenue over the lifetime of a subscription, which reflects the ongoing service you provide. Your policies should explicitly state how your company identifies contracts, defines performance obligations, determines transaction prices, and allocates that price across obligations. Having this rulebook in place removes ambiguity and ensures everyone on your team applies the standards consistently, which is fundamental for accurate financial transparency. This clarity is your best defense against errors and misinterpretations down the line.
Implement Staff Training
A detailed policy is only effective if your team understands how to apply it. That’s why comprehensive staff training is non-negotiable. Your finance and accounting teams need to be well-versed in the nuances of ASC 606, especially as it applies to different SaaS revenue streams like subscriptions, usage-based fees, professional services, and hardware. A good training program should cover the five-step model and use real-world examples from your own business to illustrate complex scenarios. Investing in your team’s education empowers them to make confident, compliant decisions, reducing the risk of costly mistakes and ensuring your policies are followed correctly from the start.
Automate Key Processes
Relying on manual spreadsheets for ASC 606 compliance is not only time-consuming but also incredibly risky. A single formula error can throw off your entire financial statement. This is where automation becomes a critical part of your strategy. Implementing revenue recognition software allows you to establish and enforce specific rules for allocating your total contract price to performance obligations. Once set, these rules can be automatically applied to new contracts, which dramatically streamlines the process. Automating these workflows reduces the chance of human error, improves efficiency, and creates a clear, consistent audit trail for every transaction.
Establish Quality Control Measures
Think of quality control as the safety net for your revenue recognition process. These are the checks and balances you put in place to catch potential issues before they become major problems. Quality control measures can include peer reviews of complex contracts, mandatory manager approvals for manual journal entries, and system-based alerts for unusual transactions. The goal is to build a system where accuracy is constantly verified. By standardizing your procedures and embedding these checks into your daily workflow, you create a culture of accountability and ensure your financial data is consistently reliable, accurate, and audit-ready.
Set Up Regular Internal Reviews
ASC 606 compliance isn’t a one-time project; it requires ongoing attention. Setting up a schedule for regular internal reviews is essential for maintaining accuracy and catching discrepancies early. These reviews, whether monthly or quarterly, give you a chance to examine your revenue recognition practices, review new or modified contracts, and ensure your disclosures are complete. ASC 606 requires more detailed information in financial statements, including breakdowns of revenue and contract balances. Consistent internal audits help you stay on top of these requirements and make sure your reporting always provides a clear and accurate picture of your company’s financial performance.
How to Prepare for Your ASC 606 Audit
An audit doesn’t have to be a source of stress. With the right preparation, you can walk into the process with confidence, knowing your records are clean and your policies are sound. Preparing for your ASC 606 audit is about creating a clear, logical trail that demonstrates how you’ve applied the five-step model to your contracts. It’s your chance to tell the story of your revenue, backed by solid documentation and consistent processes.
A smooth audit saves you time, reduces back-and-forth with your auditors, and reinforces trust with your stakeholders. By taking a proactive approach, you can address potential issues before they become major headaches. Think of it as a health check for your revenue recognition practices. The following steps will help you get organized, review your methods, and anticipate what your auditors will be looking for, ensuring you’re ready to go when they arrive.
Conduct a Pre-Audit Assessment
Before your auditors even schedule a meeting, take the time to perform your own internal review. A pre-audit assessment is your opportunity to see your processes through an auditor’s eyes. Walk through the five-step model for a sample of your contracts, from identifying the contract to recognizing revenue. The core principle of ASC 606 is to recognize revenue when you transfer control of goods or services to your customer. Does your current process align with this? Document your findings and create a plan to address any gaps you discover. This proactive step can resolve many potential audit questions before they’re ever asked.
Organize Your Documentation
Clear, organized documentation is your best friend during an audit. Your goal is to make it easy for auditors to follow your work and understand your conclusions. Gather all relevant documents, including customer contracts, amendments, master service agreements, and any internal memos that outline your revenue recognition policies. Strong documentation is critical because it improves financial transparency and proves you have a consistent, compliant process in place. Create a centralized folder for each contract being audited and ensure every piece of evidence, from initial signing to final revenue entry, is accounted for and easy to find.
Review Your Revenue Recognition Methods
SaaS business models can be complex, and your revenue recognition methods must accurately reflect how you deliver value. Whether you recognize revenue over the contract term, based on milestones, or using another method, be prepared to justify your approach. Different SaaS revenue recognition essentials depend entirely on your specific contract terms and business realities. Review your methods for consistency across similar contracts and ensure they align with your performance obligations. If you’ve made significant judgments, such as estimating variable consideration, document the rationale and data you used to arrive at your conclusion.
Anticipate Common Audit Questions
Auditors will focus on areas that require significant judgment. Be ready to answer detailed questions about how you identified distinct performance obligations, allocated the transaction price, and handled contract modifications. They will likely dig into your most complex deals, so have your explanations ready. Understanding common revenue recognition pitfalls can help you prepare for these conversations. Practice walking through your reasoning for a few key contracts. Having clear, confident answers for these predictable questions shows auditors that you have a strong grasp of your ASC 606 application and have done your due diligence.
Maintain Ongoing Compliance
ASC 606 compliance isn’t a one-time project; it’s an ongoing process. As your business grows and your contracts evolve, your revenue recognition practices must keep pace. The best way to stay prepared for future audits is to build compliance into your daily operations. This means training your sales and finance teams on ASC 606 implications and establishing clear internal controls for contract review and revenue reporting. Using ASC 606 software can help automate and streamline these processes, reducing the risk of manual error and ensuring consistency as you scale.
Frequently Asked Questions
Why is ASC 606 such a big deal for SaaS companies specifically? SaaS business models are built on ongoing relationships, not one-time sales. Before ASC 606, the rules weren’t designed for contracts that bundle software access, support, and setup fees over several years. This standard creates a single, clear method that better reflects the continuous value you provide to customers. It forces you to match the revenue you record with the service you actually deliver each month, which gives a much more accurate picture of your company’s financial health over time.
What’s the difference between recognizing revenue when I send an invoice versus under ASC 606? Sending an invoice is a billing activity, while recognizing revenue is an accounting activity. In the past, these two events were often treated as the same thing. Under ASC 606, you can only recognize revenue as you fulfill your promises to the customer. For example, if a customer pays you for an entire year upfront, you can’t record all that cash as revenue in the first month. Instead, you would recognize one-twelfth of that revenue each month as you provide the service, even though the cash is already in your bank account.
Can you give a simple example of handling a typical SaaS contract? Imagine a customer signs a one-year, $1,200 contract that also includes a one-time $300 setup fee. It’s tempting to record the $300 right away. However, ASC 606 requires you to determine if that setup service is a distinct promise. Often, it isn’t, because it has no value without the software subscription. In that case, you would treat the total contract value as $1,500 and recognize it evenly over the 12-month term, which comes out to $125 per month. This approach accurately reflects that the setup fee is part of the total value delivered over the entire year.
What’s the most common mistake you see companies make with ASC 606? The most frequent issue is incorrectly identifying performance obligations. Sales teams are great at bundling services like software access, support, and training into one attractive price, but for accounting, you have to pull those items apart. Many companies fail to properly assess whether a service like “implementation” is a distinct promise or simply part of the main software subscription. Getting this step wrong throws off all the subsequent steps, from allocating the price to timing your revenue, leading to inaccurate financial statements.
My company is small. Do I really need to worry about all this right now? Yes, absolutely. Establishing good revenue recognition habits from the start is far easier than trying to clean up messy books later on. Even if you don’t need a formal audit today, you will if you plan to seek investment, apply for a loan, or eventually sell the company. Starting with a compliant process builds a scalable financial foundation that supports your growth and demonstrates to potential partners that your business is well-managed and your numbers are reliable.