As your SaaS company scales, your financial processes must mature along with it. Moving beyond simple cash-based accounting to a more sophisticated model is a critical rite of passage. This is where ASC 606 becomes essential. Proper compliance is a non-negotiable step for any business looking to attract serious investment, prepare for an audit, or plan for a future acquisition. It signals to the market that your company has a solid, reliable financial foundation. This guide is for founders and finance leaders who are ready to build that foundation, starting with a clear and effective ASC 606 implementation for SaaS.
Key Takeaways
- Recognize Revenue Over Time, Not Upfront: The core principle of ASC 606 for SaaS is to match revenue to the delivery of your service. This means recognizing income throughout the subscription period as you fulfill your promises, rather than booking it all when you receive payment.
- Treat Every Contract Component as a Separate Promise: You must identify each distinct service in your customer contracts—like software access, implementation, and support—as a separate performance obligation. This ensures you allocate the transaction price accurately based on the value of each deliverable.
- Make Compliance an Ongoing Business Process: ASC 606 isn’t a one-time project. Build a sustainable framework by using the right software to automate tasks, training your team consistently, and regularly reviewing your policies to adapt to new products, pricing, and contract changes.
What is ASC 606 for SaaS Companies?
Think of ASC 606 as the universal rulebook for reporting revenue. This accounting standard, issued by the Financial Accounting Standards Board (FASB), creates a single, comprehensive framework for how and when companies should recognize the income they earn from customer contracts. While it applies to nearly every industry, it has a particularly significant effect on Software as a Service (SaaS) companies because of their unique subscription-based business models.
Before ASC 606, revenue recognition rules were often industry-specific and could be interpreted in different ways. This made it difficult for investors and stakeholders to compare the financial health of two different companies. The new standard sweeps away that ambiguity with a clear, five-step process. For a SaaS business, this means you no longer recognize revenue just when a customer pays for a year-long subscription. Instead, you recognize it over the life of that subscription as you deliver the service. This shift provides a more accurate picture of your company’s performance over time.
Why ASC 606 Matters
Adopting ASC 606 isn’t just about compliance; it’s about building a stronger financial foundation for your business. The standard helps SaaS companies establish clear, consistent rules for how they count their revenue. This consistency is crucial for making your financial reports audit-ready and giving investors a transparent view of your company’s performance. When everyone follows the same rules, it’s easier for potential investors, partners, and lenders to understand your financial health and trust the numbers you present. It levels the playing field and ensures your revenue figures are both reliable and comparable to others in your industry.
What’s New in ASC 606?
The core principle of ASC 606 is simple: a company should recognize revenue when it transfers promised goods or services to a customer, in an amount that reflects what it expects to receive. For SaaS companies, this is a major change. Instead of booking all the cash from an annual contract as revenue upfront, ASC 606 requires you to recognize that revenue over the lifetime of the subscription. This approach better reflects the ongoing nature of the service you provide. The new guidance shifts the focus from when cash is collected to when value is delivered to the customer, which is a more accurate way to measure SaaS revenue recognition.
The Impact on SaaS Revenue
While the principle is straightforward, applying it can be complex. Counting revenue for SaaS companies is a challenge because business models are often intricate and constantly evolving. ASC 606 requires you to look closely at your customer contracts to identify distinct “performance obligations”—the specific promises you’ve made to your customer. This could include the software license, customer support, implementation fees, and future updates. You then have to assign a value to each of these obligations and recognize the revenue as each one is fulfilled. This means that common SaaS metrics like MRR and ARR are still vital for internal tracking, but the way you report revenue externally requires a more thoughtful analysis of your subscription models.
How to Implement ASC 606 in 5 Steps
Breaking down ASC 606 compliance into manageable steps makes the process much clearer. The standard provides a five-step framework that guides you through identifying your contracts, understanding your obligations, and recognizing revenue at the right time. While it might seem complex at first, this model is designed to create a consistent approach for all businesses, especially those with recurring revenue models like SaaS. Think of it as a roadmap for accurately reflecting your company’s financial performance.
Following these steps ensures you’re not just checking a compliance box; you’re building a solid foundation for financial reporting that stakeholders can trust. Each step builds on the last, so it’s important to address them in order. Let’s walk through what each stage involves and how you can apply it to your SaaS business. With a clear plan, you can confidently handle the transition and maintain compliance as your company grows.
1. Identify Your Customer Contracts
The first step is to identify the contract with your customer. This might sound simple, but under ASC 606, a “contract” is any agreement that creates enforceable rights and obligations. It doesn’t have to be a lengthy, signed document; it could be your standard online terms of service that a customer agrees to upon signup. For a contract to be valid under this standard, it must be approved by both parties, identify each party’s rights, outline payment terms, have commercial substance, and make it probable that you’ll collect payment. As SaaS companies often receive payments upfront for future services, establishing a clear contract is the critical starting point for proper revenue recognition.
2. Pinpoint Your Performance Obligations
Once you have a contract, you need to identify your “performance obligations.” These are the specific promises you’ve made to your customer. In a SaaS context, this is often more than just providing access to your software. It could also include setup services, training, technical support, or future updates. Each of these distinct promises is a separate performance obligation. Understanding these criteria is the foundation for aligning your revenue recognition with ASC 606. It ensures your financial reporting accurately reflects how and when you deliver value to your customers. Properly separating these obligations is key to recognizing revenue correctly in the later steps.
3. Set the Transaction Price
Next, you need to determine the transaction price. This is the total amount of compensation you expect to receive from the customer in exchange for the goods or services you’re providing. For some SaaS businesses with simple subscription plans, this is a straightforward monthly or annual fee. However, it can get complicated if your pricing includes variable elements like usage-based fees, discounts, rebates, or performance bonuses. You must estimate this variable consideration to arrive at the total transaction price. This figure becomes the basis for the revenue you’ll recognize as you fulfill your performance obligations.
4. Allocate the Price to Each Obligation
After setting the total transaction price, you have to allocate it across the different performance obligations you identified in step two. This allocation must be based on the standalone selling price (SSP) of each distinct good or service. The SSP is the price you would charge a customer for that item on its own. For example, if your contract includes a software subscription and a one-time implementation fee, you’ll need to assign a portion of the total contract price to each. Companies must show they have consistent methods for reallocating revenue based on SSP, ensuring that revenue is tied to the actual value of each deliverable.
5. Recognize Revenue as Obligations are Met
The final step is to recognize revenue when (or as) you satisfy each performance obligation. This means you record the revenue after you’ve transferred the promised good or service to the customer. For SaaS companies, this is typically done “over time” rather than at a single “point in time.” ASC 606 requires SaaS companies to recognize revenue over the lifetime of a subscription, reflecting the ongoing service they provide. For instance, if a customer pays for an annual subscription upfront, you would recognize one-twelfth of that revenue each month. If you need help structuring this process, our team of seasoned professionals is here to guide you.
Overcoming Common Implementation Challenges
Transitioning to ASC 606 isn’t always a straight path, especially for SaaS companies. The nature of subscription models, ongoing services, and customer relationships introduces unique hurdles. But with a clear understanding of these potential roadblocks, you can create a strategy to handle them effectively. Let’s walk through some of the most common challenges you might face and how to approach them.
Managing Complex Contracts
SaaS contracts are rarely simple, one-time transactions. They often involve services delivered over a long period, making it tricky to pinpoint when control transfers to the customer. You need a solid process for assessing how revenue should be recognized throughout the contract term. Things get even more complicated when customers upgrade, downgrade, or extend their plans. Each change requires a careful review to see if it’s a modification to the existing contract or a new performance obligation, both of which can significantly alter the timing and amount of revenue you recognize.
Handling Variable Pricing
The flexibility of SaaS pricing is great for attracting customers but can create headaches for accounting. Elements like one-time setup fees, usage-based billing, discounts, and different subscription terms (monthly vs. annual) all fall under variable consideration. This complexity makes it difficult to determine the transaction price for each contract. Getting this step wrong can lead to misstated revenue and time-consuming corrections down the road. A clear policy for estimating and allocating this variable revenue is essential for accurate SaaS revenue recognition.
Assessing Performance Obligations
Under ASC 606, you have to identify every distinct promise you make to a customer in a contract. For a SaaS business, this could include software access, setup services, technical support, and training. Each of these might be a separate “performance obligation.” The challenge is determining which promises are distinct and which are bundled together. This assessment is a critical part of the five-step process and directly impacts how you allocate the transaction price and recognize revenue over time, so it requires careful judgment.
Dealing with Contract Modifications
Customer needs change, and your contracts will likely change with them. Whether it’s an upgrade to a higher tier or the addition of a new feature, every modification needs to be accounted for under ASC 606. These changes can be treated as a separate contract or as an adjustment to the original one, and knowing which path to take creates difficulties if you don’t have a clear process. Proper handling also requires more detailed disclosures in your financial statements, explaining the judgments you made and the impact of the changes on your revenue.
Integrating Your Systems
Manually tracking complex contracts, variable pricing, and performance obligations in spreadsheets is not a sustainable solution. As your business grows, you need systems that can talk to each other—from your CRM to your billing platform to your accounting software. Without proper integration, you risk data entry errors, compliance issues, and an enormous amount of manual work. Investing in the right technology allows you to automate and streamline your revenue recognition processes, ensuring you can manage the complexities of ASC 606 efficiently and accurately.
Tools and Resources for a Smooth Transition
Making the switch to ASC 606 doesn’t have to be a solo mission. With the right tools and resources, you can create a clear path to compliance that supports your team and scales with your business. Think of this as building your implementation toolkit—it’s about having the right support system in place to make the process as seamless as possible. From specialized software that handles the heavy lifting to clear documentation that keeps everyone on the same page, these resources are designed to simplify complexity and give you confidence in your financial reporting.
A successful transition hinges on preparation and a solid understanding of the new landscape. This means equipping your team with knowledge, establishing strong internal processes, and leveraging technology to automate where you can. Let’s walk through the key components you’ll want to have in your corner.
Revenue Recognition Software
For most SaaS companies, trying to manage ASC 606 compliance on spreadsheets is a recipe for headaches and errors. That’s where revenue recognition software comes in. This technology is designed to automate and streamline the entire process, from allocating transaction prices to recognizing revenue over the life of a subscription. Think of it as your compliance engine, working in the background to apply your specific rules consistently across all contracts.
Good ASC 606 software helps you establish and enforce formulas for re-allocating your total contract price to different performance obligations. This automation not only saves countless hours but also significantly reduces the risk of human error. As your company grows and your contracts become more complex, this software scales with you, ensuring your data management and reporting remain efficient and accurate.
Key Documentation You’ll Need
Getting your documents in order is a critical first step. Clear, comprehensive documentation is the foundation of your compliance framework and will be your go-to resource during an audit. Start by gathering all active customer contracts. You’ll need to review each one to identify the specific promises you’ve made to your customers, as these form your performance obligations.
Next, create an internal policy document that outlines your company’s approach to ASC 606. This guide should detail how you identify contracts, define performance obligations, determine transaction prices, and allocate those prices. Having a clear implementation guide ensures everyone on your team applies the rules consistently. Finally, maintain detailed records that track the fulfillment of each performance obligation, so you always know when to recognize revenue.
Training Your Team
ASC 606 isn’t just a task for the finance department—it impacts teams across your entire organization. Your sales team needs to understand how contract terms affect revenue timing, your legal team must draft agreements with compliance in mind, and your finance team needs to oversee the entire process. Proper training is essential to get everyone aligned and working together.
Start by hosting workshops that explain the five-step model and its specific impact on your business. Provide clear documentation and real-world examples based on your own contracts. An informed team is your best asset for maintaining compliance. When everyone understands their role in the new revenue recognition standard, you can avoid common pitfalls and build a culture of accuracy and accountability.
Setting Up Internal Controls
Once you’ve implemented the new standard, you need a system to keep everything on track. Internal controls are the policies and procedures that act as guardrails for your revenue recognition process. These controls ensure that your data is accurate, your reporting is consistent, and your compliance is sustainable over the long term. For example, you might implement a mandatory contract review process where a designated expert signs off on all new agreements.
Other key controls include standardized procedures for identifying performance obligations and a formal system for tracking and approving contract modifications. Changes like upgrades or extensions require careful reassessment under ASC 606, and strong controls ensure nothing slips through the cracks. These processes are vital for understanding how ASC 606 impacts technology companies and provide the structure needed for reliable financial reporting.
Best Practices for a Successful Rollout
Moving through the five-step model for ASC 606 is one thing, but making it a smooth and sustainable process is another. Adopting a few key best practices can make all the difference, turning a complex compliance requirement into a streamlined part of your financial operations. Think of these as the habits that will keep your revenue recognition accurate and your audits clean long after the initial implementation is over. By focusing on consistency, clear processes, and transparency from the start, you set your team up for success and build a solid foundation for financial reporting that scales with your business. These practices will help you handle the nuances of SaaS contracts with confidence.
Determine the Standalone Selling Price
One of the trickiest parts of ASC 606 for SaaS companies is figuring out the standalone selling price (SSP) for each distinct service you offer. This is the price you’d charge a customer for a specific performance obligation—like a software license, a support package, or an implementation service—if you sold it separately. It can be especially challenging to establish a consistent method for software licenses. The key is to create a clear, defensible methodology for determining SSP and apply it consistently across all your contracts. Documenting your approach is crucial, as it provides the evidence and reasoning auditors will need to see.
Manage Contract Modifications Effectively
SaaS business models are dynamic. Customers upgrade, downgrade, and add new services all the time. Each of these changes is a contract modification that can complicate your revenue recognition. Without a clear system, it’s easy for these adjustments to create accounting errors. It’s essential to establish a formal process for how your team handles every modification. This ensures that any changes to the scope or price of a contract are assessed correctly under ASC 606 and that revenue is adjusted appropriately. If creating this process feels overwhelming, our team of experts can help you build a framework that fits your business.
Monitor Your Performance Obligations
Your work isn’t finished once you’ve identified your performance obligations and allocated revenue. Ongoing monitoring is critical to maintaining compliance. You need to consistently track the delivery of each service and ensure you have controlled methods for reallocating revenue if contract terms or standalone selling prices change. This is especially important for long-term contracts where services are delivered over time. Regular reviews help you catch potential issues early and demonstrate that your revenue recognition practices are both accurate and consistently applied, which is exactly what auditors want to see.
Improve Your Disclosure Practices
ASC 606 requires more than just getting the numbers right—it demands greater transparency in your financial reporting. You need to provide clear, detailed disclosures about the judgments you’ve made, such as how you determined transaction prices and satisfied performance obligations. This includes sharing more information about future revenue from promised services, often called “backlog disclosures.” Enhancing your disclosure practices isn’t just about compliance; it’s about building trust with investors and stakeholders. At GuzmanGray, we believe that clear and comprehensive financial reporting is a cornerstone of a healthy, growing business.
How ASC 606 Affects Financial Reporting
Adopting ASC 606 is more than a box-ticking exercise; it fundamentally reshapes how your SaaS company presents its financial health to the world. The standard changes the timing and pattern of revenue recognition, which has a ripple effect across your key financial statements. Your balance sheet will look different, your income statement will tell a new story, and even the KPIs you rely on will need a second look. The goal of these changes is to create a more accurate and transparent picture for investors, stakeholders, and your own leadership team. By understanding these impacts, you can better explain your company’s performance and make more informed strategic decisions. Let’s walk through the specific ways ASC 606 will alter your financial reporting.
Changes to Your Balance Sheet
One of the most visible impacts of ASC 606 is on your balance sheet. The standard requires you to recognize revenue over the lifetime of a subscription, which better reflects the ongoing nature of the service you provide. This means you’ll likely see changes in accounts like deferred revenue and the introduction of contract assets and liabilities. For example, costs to acquire a contract, like sales commissions, may now be capitalized as an asset and amortized over the contract term. This approach gives a more accurate representation of your company’s financial position by aligning the balance sheet with the actual delivery of your services and the costs associated with them.
Effects on Your Income Statement
Your income statement will also see significant changes, primarily in the timing of revenue recognition. Under ASC 606, revenue is recognized only when you satisfy a performance obligation by transferring control of a service to your customer. This is a major shift from older, cash-based methods. For some SaaS companies, this might mean recognizing revenue more smoothly over the contract term. For others with complex contracts involving setup fees, training, and multiple services, it could lead to fluctuations in reported income. The key is that revenue is now tied directly to value delivery, not just invoicing, which can impact your reported profitability from one period to the next.
Key KPIs and Metrics to Track
While your favorite SaaS metrics like Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR) remain essential for running your business, ASC 606 requires a more disciplined approach to how you report revenue externally. You’ll need to ensure your internal tracking methods can be reconciled with the new revenue recognition standards. For instance, a multi-year deal paid upfront doesn’t mean you can recognize all that cash as revenue in your financial statements. This means you must carefully analyze your subscription models and performance obligations to ensure your key SaaS metrics align with ASC 606 principles for official reporting, providing a clear and compliant view of your company’s growth.
Understanding Disclosure Requirements
Transparency is a cornerstone of ASC 606. The standard requires you to share much more detail in the notes of your financial reports. You’ll need to explain the significant judgments you made when applying the five-step model, such as how you determined performance obligations and allocated transaction prices. You must also provide information about your remaining performance obligations, often called “backlog disclosures,” which gives stakeholders insight into future revenue streams. While this means more work, this increased transparency helps build trust by giving investors a clearer, more complete understanding of how your company generates revenue.
How to Build a Sustainable Compliance Framework
Implementing ASC 606 is a significant project, but the work doesn’t stop once you go live. To maintain compliance and support your company’s growth, you need a framework that can stand the test of time. A sustainable compliance framework isn’t about setting rigid rules; it’s about creating a system that adapts as your business evolves. It’s built on a foundation of knowledgeable people, clear processes, and smart technology that work together seamlessly.
Think of it as the ongoing maintenance that keeps your revenue recognition engine running smoothly. Without it, you risk falling out of compliance as you introduce new products, change pricing, or expand into new markets. A solid framework ensures that your financial reporting remains accurate and reliable, giving investors, stakeholders, and leadership confidence in your numbers. It transforms compliance from a reactive chore into a proactive business function that supports strategic decisions. Building this structure involves four key areas: training your team, regularly reviewing your policies, implementing quality controls, and continuously monitoring your processes. By focusing on these pillars, you can create a compliance practice that is both robust and flexible enough to handle whatever comes next. Our assurance services are designed to help you build and maintain exactly this kind of resilient framework.
Train and Develop Your Staff
Your team is your most critical compliance asset. Every person in your finance and accounting department should have a clear understanding of how ASC 606 applies to your business. As one expert notes, “Successfully scaling a SaaS business requires a solid understanding of your financials, and a key part of that is mastering revenue recognition under ASC 606.” Your training program should be practical and tailored to your specific operations. Cover the five-step model, but use your own company’s contracts as real-world examples. Ensure your team can confidently identify performance obligations, handle contract modifications, and understand the documentation required for each step. Ongoing training is just as important, especially when you hire new team members or introduce new service offerings.
Review Policies Regularly
The SaaS world moves fast, and your revenue recognition policies need to keep up. A policy you wrote last year might not fully capture the nuances of a new pricing tier or a different type of customer agreement you’re using today. That’s why regular policy reviews are non-negotiable. Set a schedule—quarterly or semi-annually—to review and update your ASC 606 documentation. It’s also wise to trigger a review anytime you make significant business changes. As experts from Cerini and Associates point out, “Changes in contract terms, such as upgrades or extensions, require reassessment under ASC 606.” By being proactive, you ensure your policies accurately reflect how your business operates today, not how it operated yesterday.
Implement Quality Control Measures
Mistakes can happen, but strong quality control measures can catch them before they become major issues. These controls are the checks and balances that ensure your revenue recognition process is consistently applied and documented correctly. This can include a mix of manual and automated processes. For example, you might require a secondary review for any non-standard contracts or implement checklists for your team to follow. Technology can also be a huge help here. As the team at Maxio explains, “Using ASC 606 software helps automate and streamline this process, ensuring compliance and reducing the risk of errors and non-compliance.” The right tools can enforce your policies, automate complex calculations, and create an audit trail, strengthening your overall control environment.
Develop an Ongoing Monitoring Strategy
A sustainable framework requires continuous oversight. An ongoing monitoring strategy helps you confirm that your controls are working effectively and that your financial reporting remains accurate over time. This isn’t about micromanaging; it’s about maintaining a high-level view to spot trends or potential issues early. Your monitoring activities should include tracking key performance indicators (KPIs) related to revenue, reviewing disclosures for completeness, and periodically testing your internal controls. As CFO Pro Analytics highlights, “Proper revenue recognition practices help SaaS companies adhere to these regulations, avoiding potential legal and financial repercussions.” A proactive monitoring strategy is your best defense against compliance drift and ensures you’re always prepared for an audit. If you need help setting up a monitoring plan, feel free to contact us.
How to Future-Proof Your ASC 606 Compliance
Getting compliant with ASC 606 is a huge accomplishment, but the work doesn’t stop there. For a growing SaaS company, compliance isn’t a one-time project; it’s an ongoing commitment. Your business is constantly evolving—you launch new products, update pricing, and expand into new markets. Your compliance framework needs to keep up. Staying ahead of the curve means you can avoid costly fire drills and give your stakeholders a clear, accurate picture of your company’s financial health. Here are four key practices to build a sustainable and future-proof ASC 606 compliance strategy.
Keep Your Systems Updated
Relying on spreadsheets to manage revenue recognition is a recipe for headaches as your company scales. Manual processes are inefficient and prone to error. The best way to stay on top of compliance is to invest in the right technology. Using ASC 606 software helps automate and streamline the entire process. When choosing a tool, look for one that integrates smoothly with your existing financial systems, like your CRM and billing platform. This creates a single source of truth for your revenue data and frees up your team to focus on more strategic analysis.
Conduct Regular Compliance Reviews
Think of your compliance framework as something that needs regular check-ups. It’s a good practice to schedule periodic reviews—quarterly or annually—to ensure your processes are still aligned with ASC 606 guidelines. This is especially important whenever you change your contracts. Things like customer upgrades or service extensions require reassessment to determine if they are separate performance obligations or modifications to existing ones. Since revenue is recognized when you transfer control of a service, these changes in contract terms can directly impact the timing of your revenue recognition, so staying proactive is key.
Communicate with Stakeholders
Clear communication is fundamental to maintaining trust with your stakeholders, including investors, board members, and auditors. They rely on your financial statements to make important decisions, and transparent reporting on your revenue recognition policies is a big part of that. Proper revenue recognition helps you adhere to regulations and avoid potential legal and financial repercussions. Make sure your team can clearly articulate your ASC 606 policies and their impact on your financials. Keeping everyone informed reinforces your company’s commitment to financial integrity.
Adapt as Your Business Changes
The only constant in the SaaS world is change. You might introduce a new pricing tier, bundle services differently, or alter how you deliver your product. Every business decision can have implications for your ASC 606 compliance. Because SaaS companies often provide services over time, you have to carefully assess when control of the service is transferred to the customer and how revenue should be recognized over the contract period. Your compliance framework needs to be flexible enough to adapt with your business model. Building adaptability into your processes ensures that as your company grows, your revenue recognition stays accurate and compliant.
Frequently Asked Questions
How does ASC 606 change how I think about my company’s key metrics, like MRR and ARR? This is a great question because it gets to the heart of running your business versus reporting on it. You should absolutely continue to track metrics like MRR and ARR, as they are vital for understanding your company’s growth and momentum internally. However, ASC 606 governs your official financial statements. The revenue you report externally might not perfectly align with your internal metrics, especially if you have contracts with multiple services or variable fees. Think of MRR as your operational pulse, while your ASC 606-compliant revenue is the official health record you show to investors and auditors.
Is this a one-time project, or do I need to worry about ASC 606 continuously? Think of the initial implementation as building a new foundation for your house—it’s a huge project, but it’s not the end of the story. True compliance is an ongoing process. As your SaaS business grows and evolves, you’ll introduce new pricing, change your service offerings, and update contract terms. Each of these changes requires you to revisit your ASC 606 framework to ensure it still applies correctly. The goal is to build a sustainable practice that adapts with your business, not just to complete a one-time checklist.
We’re a small but growing SaaS company. Do we really need specialized software for this? While you can certainly start out using spreadsheets, it often becomes unmanageable and risky much faster than founders expect. As your customer base grows and your contracts become more varied, the chance of human error increases dramatically. Specialized software is designed to automate the complex calculations and allocations required by ASC 606. It creates a reliable audit trail and ensures your rules are applied consistently, freeing up your team to focus on analysis rather than manual data entry.
What’s the most common mistake you see SaaS companies make when implementing ASC 606? One of the most frequent missteps is failing to correctly identify all the distinct “performance obligations” in a customer contract. It’s easy to think of a subscription as a single promise, but ASC 606 requires you to look closer. If your contract also includes things like implementation services, dedicated training, or premium support, each of those might be a separate promise that requires you to allocate a portion of the contract price to it. Getting this step wrong can throw off the timing of your revenue recognition for the entire contract.
My contracts often change when customers upgrade or add new features. How does ASC 606 handle that? Contract modifications are a normal part of the SaaS lifecycle, and ASC 606 has specific guidance for them. Each time a contract changes, you have to assess whether the change is a modification of the original agreement or if it should be treated as an entirely new contract. The answer determines how you recognize the remaining revenue. This is why having a clear, documented process for reviewing every upgrade, downgrade, or add-on is so important for maintaining accurate financial reporting.