When an audit notice arrives, there are two types of finance teams: the ones who calmly pull together their well-organized files, and the ones who launch into a frantic, all-hands-on-deck scramble. The difference isn’t magic; it’s a commitment to proactive compliance. An audit doesn’t have to be a disruptive fire drill that pulls your entire team away from their real work. By building the right systems, documentation practices, and internal controls ahead of time, you can make it a smooth, predictable process. This guide provides the roadmap to get ahead of the curve and feel fully prepared for your asc 606 audit for saas companies.
Key Takeaways
- Break Down Your Contracts with Precision: To comply with ASC 606, you must identify every distinct service in your customer agreements and assign a fair standalone value to each. This ensures your revenue is recognized accurately as you deliver on your promises, providing a true picture of your financial health.
- Make Your Business Audit-Ready by Default: Don’t wait for auditors to call to get organized. Build strong habits now by keeping meticulous documentation for every contract, implementing consistent internal controls, and using specialized software to automate complex revenue calculations.
- Turn Compliance into a Continuous Process: ASC 606 isn’t a set-it-and-forget-it rule. Treat compliance as an ongoing cycle by regularly reviewing your policies as your business evolves, continuously monitoring your controls, and maintaining a proactive, year-round relationship with your auditors.
What Is ASC 606 and Why Does It Matter for SaaS?
ASC 606 is the accounting standard that completely changed how companies report their income. If you’re running a Software as a Service (SaaS) company, this standard is especially important. It creates a single, comprehensive framework for SaaS revenue recognition, which brings much-needed consistency and transparency to your financial statements. Think of it as a universal language for reporting revenue that everyone—from your internal team to potential investors—can understand. Before ASC 606, revenue recognition rules were scattered and industry-specific, leading to confusion and making it difficult to compare financials between companies. This new standard streamlines everything into one cohesive model.
Why does this matter so much? For starters, adhering to ASC 606 helps you establish clear and consistent financial policies. This isn’t just about checking a box for compliance; it’s about building a solid financial foundation for your business. When your books are in order according to this standard, your financial reports become audit-ready. This is a huge deal when you’re looking to attract investors, secure a loan, or simply build trust in the market. Clean, compliant financials show that your business is professional, reliable, and ready for growth. It removes ambiguity and gives stakeholders a clear, accurate picture of your company’s performance, which is invaluable in the competitive SaaS landscape.
The Five-Step Revenue Recognition Process
To stay compliant, ASC 606 outlines a clear five-step process for recognizing revenue. It’s a logical framework that guides you from the initial customer agreement to recording the income in your books. Following these steps ensures you recognize revenue at the right time and in the right amount.
Here’s a breakdown of the model:
- Identify the contract with a customer: This means confirming you have a clear, enforceable agreement.
- Identify the performance obligations: Pinpoint the specific goods or services you’ve promised to deliver.
- Determine the transaction price: Figure out the total amount you expect to receive for those promises.
- Allocate the transaction price: If there are multiple promises, you’ll need to assign a portion of the price to each one.
- Recognize revenue: Record the revenue as you fulfill each performance obligation.
How It Specifically Affects SaaS Companies
SaaS companies often face unique hurdles with ASC 606 because of their business models. Subscription-based revenue, bundled services, and contracts that change over time can make things tricky. Counting revenue is a significant challenge for SaaS businesses because their contracts can be very complex and their offerings are constantly evolving. For example, a single contract might include a software subscription, implementation services, and ongoing customer support, all of which need to be treated as separate performance obligations.
The standard requires you to carefully dissect these agreements and allocate revenue appropriately, which can feel daunting at first. However, getting this right is crucial. It leads to more accurate and reliable financial reporting, which ultimately strengthens your business and builds confidence with investors and auditors.
Key ASC 606 Concepts for SaaS Companies
Getting comfortable with ASC 606 means understanding its core principles. For SaaS companies, revenue isn’t as simple as a one-time sale; it’s a continuous relationship with your customer. The standard breaks this relationship down into a few key concepts that help you accurately reflect when and how you earn your revenue. Think of these as the building blocks for compliant accounting. Mastering them will not only prepare you for an audit but also give you a clearer picture of your company’s financial health. Let’s walk through the concepts that matter most for a subscription-based model.
Identify Performance Obligations in Subscriptions
First, you need to pinpoint every distinct promise you make to your customer in a contract. These promises are called “performance obligations.” For a SaaS company, the most obvious one is access to your software platform. But what else is included? Think about implementation services, technical support, training sessions, or future updates. Under ASC 606, you must identify all the specific goods or services you’ve agreed to deliver. If a customer can benefit from a service on its own or with other readily available resources, it’s likely a distinct performance obligation that needs to be accounted for separately. This step is foundational to getting your revenue recognition right from the start.
Determine Standalone Selling Prices
Once you’ve listed all your performance obligations, you need to assign a value to each one. This is known as the standalone selling price (SSP)—what you would charge for that specific service if you sold it separately. This can be tricky for SaaS companies that bundle services together in one subscription fee. You’ll need to make informed judgments and estimates to determine the SSP for each component, from the software license to premium support. This is a critical step, as these values form the basis for how you’ll allocate the total contract price, and it’s an area auditors will examine closely to ensure your logic is sound and consistently applied.
Allocate Transaction Prices for Bundled Services
With your performance obligations identified and their SSPs determined, the next step is to allocate the total contract price across them. This allocation must be proportional to the standalone selling prices you just established. For example, if a customer pays $15,000 for an annual subscription that includes software access (SSP of $12,000) and implementation services (SSP of $4,000), you can’t just recognize the full amount evenly. You have to allocate the transaction price to reflect the value of each distinct service you’re providing throughout the contract term. This ensures revenue is recognized as each promise is fulfilled.
Manage Variable Consideration and Contract Changes
SaaS contracts are rarely static. They often include elements of “variable consideration,” such as performance bonuses, usage-based fees, or credits. They can also change through upgrades, downgrades, or early terminations. ASC 606 requires you to estimate the amount of variable consideration you expect to earn and include it in the transaction price. Proper management of these factors is essential for compliance. You need a solid process for tracking contract modifications and adjusting your SaaS revenue recognition to accurately reflect these changes as they happen. This ongoing diligence keeps your financial reporting accurate and audit-ready.
Common Challenges in a SaaS ASC 606 Audit
Applying the ASC 606 framework to a SaaS business isn’t always a walk in the park. The very nature of the SaaS model—with its recurring revenue, bundled services, and focus on rapid growth—creates unique accounting hurdles. While these challenges can seem intimidating, understanding them is the first step to building a compliance strategy that makes your audit process much smoother. Think of these not as roadblocks, but as key areas to focus your attention on before the auditors arrive. Getting these right from the start saves you from future headaches, financial restatements, and a lot of stress.
Many of the complexities arise because SaaS contracts are living documents. They often include multiple services delivered over time, with frequent modifications, upgrades, and add-ons. This dynamic environment requires robust systems and clear judgment calls, all backed by solid evidence. Let’s break down the most common challenges SaaS companies face during an ASC 606 audit and how you can prepare for them.
Complex Subscription and Pricing Models
Let’s be honest, SaaS pricing is rarely simple. Your company likely offers a mix of subscription tiers, usage-based billing, one-time setup fees, and professional services. This flexibility is great for attracting customers, but it can create a real tangle for revenue recognition. Each of these components might be a separate performance obligation that needs to be identified and accounted for over different timelines. A simple monthly subscription is one thing, but when you bundle software access with implementation services and ongoing technical support, you have to carefully determine how to allocate revenue for each distinct promise to the customer.
Difficulty Determining Standalone Selling Prices
A core principle of ASC 606 is allocating a contract’s transaction price based on the Standalone Selling Price (SSP) of each performance obligation. In plain English, you need to figure out what you would charge for each service if you sold it separately. For many SaaS companies, this is a major challenge because services like customer support or software updates are almost never sold on their own. This means you have to develop a reasonable and consistent methodology to estimate these prices, whether it’s based on market data, costs, or another logical approach. Auditors will absolutely scrutinize how you determined your SSPs, so your logic needs to be sound and well-documented.
Strict Documentation and Evidence Requirements
ASC 606 is all about “showing your work.” It’s not enough to have the right numbers on your financial statements; you have to prove how you got there. This means maintaining meticulous documentation for every significant judgment call you make. Why did you identify three performance obligations in a contract instead of two? How did you estimate the SSP for your premium support package? You need a clear audit trail that includes contracts, policy memos, and supporting calculations. Without this evidence, auditors can’t verify your conclusions, which can lead to findings and potential adjustments. This is where having a partner to help you prepare your assurance documentation can be invaluable.
Gaps in Internal Controls
As a SaaS company grows, the simple accounting processes that worked for your first 100 customers can quickly become overwhelmed. Manual data entry, inconsistent contract reviews, and a lack of formal policies can create gaps in your internal controls. These gaps increase the risk of errors in revenue recognition. Auditors will thoroughly test your internal controls to see if they can rely on your financial data. If they find weaknesses, it signals that your financial statements may be inaccurate. Building strong, scalable internal controls is crucial for ensuring your revenue data is consistently accurate and audit-ready.
Keeping Up with Rapid Growth
The “growth at all costs” mindset is common in the SaaS world, but it can leave accounting and compliance in the dust. When your sales team is signing custom deals and your product team is constantly launching new features, your finance team can struggle to keep up. This rapid pace introduces new complexities, from managing contract modifications to applying revenue recognition rules consistently across thousands of transactions. Your accounting systems and processes must be able to scale with your business. If they can’t, you risk falling out of compliance, which can become a major obstacle to future funding rounds or an exit strategy.
How to Prepare for Your ASC 606 Audit
A smooth audit doesn’t happen by accident; it’s the result of careful preparation. Getting your ducks in a row before the auditors arrive can make the entire process less stressful and more efficient. Think of it as building a strong foundation—the more solid your prep work, the less likely you are to face unexpected questions or findings. Focusing on documentation, internal controls, team training, and regular self-checks will put you in the best possible position for a successful audit. These steps help you prove compliance and demonstrate a commitment to accurate financial reporting, which is exactly what auditors want to see.
This proactive approach transforms the audit from a dreaded event into a valuable check-up for your financial health, giving you confidence in your numbers and processes. It’s about shifting your mindset from reactive to strategic. Instead of scrambling to find documents or explain a complex contract on the spot, you’ll have everything organized and ready to go. This not only saves you and your team valuable time but also builds trust with your auditors. When they see a well-organized, transparent system, they can perform their work more effectively, leading to a smoother experience for everyone involved. Let’s walk through the key areas to focus on so you can feel confident and prepared when audit season rolls around.
Establish Strong Documentation Practices
Your documentation is the primary evidence you’ll present to auditors, so it needs to be airtight. This means keeping meticulous records of all customer contracts, amendments, and communications related to performance obligations. For each contract, you should be able to clearly show how you identified the performance obligations, determined the transaction price, and allocated that price to each obligation. As one source notes, “Regular financial audits are key to avoiding revenue recognition errors, a critical part of your SaaS business’s success.” Strong documentation is your first line of defense and the clearest way to enhance the precision of your financial reports. Make sure your records are organized, accessible, and tell a complete story for every single contract.
Implement Strong Internal Controls
Strong internal controls are the systems and processes that safeguard your assets and ensure the integrity of your financial data. For SaaS companies, this is especially important due to subscription models and complex contracts. As experts point out, implementing strong internal controls is essential to manage these complexities effectively. This could include automating revenue calculations to reduce human error, implementing a review and approval process for new contracts, or segregating duties so that the person who books a sale isn’t the same person who recognizes the revenue. These controls provide auditors with confidence that your financial statements are reliable and that you have a system in place to prevent and detect errors.
Train Your Finance Team on ASC 606
ASC 606 is complex, and you can’t expect your team to get it right without proper training. Many companies “underestimat[e] the complexity of ASC 606,” which can lead to major compliance headaches down the road. Invest in training that covers the five-step model in detail, with a specific focus on the nuances that affect SaaS businesses, like accounting for contract modifications, commissions, and variable consideration. Your team should feel confident in their ability to apply the standard to new and existing contracts consistently. When your finance professionals are well-versed in ASC 606, they can make better day-to-day decisions and respond to auditor inquiries with confidence and clarity.
Conduct Regular Internal Reviews
Don’t wait for the external audit to find potential problems. Conducting your own internal reviews is a proactive way to catch and correct issues before they escalate. Think of it as a dress rehearsal for the main event. As one firm suggests, “Conducting regular internal reviews can help SaaS businesses understand the intricacies of revenue recognition and prepare for audits.” Set aside time each quarter or semi-annually to review a sample of contracts, check your calculations, and ensure your documentation is complete. This practice not only prepares you for the audit but also strengthens your ongoing compliance process. If you need an expert eye, our team at GuzmanGray can help you establish an effective internal review process.
What Auditors Look For in an ASC 606 Review
When an auditor reviews your books for ASC 606 compliance, they’re looking for a clear, consistent, and well-documented story of how you earn your revenue. Think of it as showing your work in a math class—the final answer matters, but the process you took to get there is what proves you understand the material. They want to see that you’ve thoughtfully applied the five-step model to your contracts and that your financial statements accurately reflect your performance. They will focus on a few key areas to verify that your revenue recognition practices are sound, leaving no stone unturned.
Contract Analysis and Performance Obligation Maps
First, auditors will want to see how you break down your customer contracts. Identifying performance obligations can be complex, especially for SaaS companies with multi-element arrangements. Auditors will closely examine how you define these obligations and whether your approach aligns with ASC 606 criteria. They’ll look for a clear “map” that shows each specific promise you’ve made to a customer—like software access, support, and implementation—and how it’s separated for revenue recognition purposes. It’s not enough to just have a contract; you need a documented analysis of what’s inside it.
Your Revenue Recognition Policies and Procedures
Next, auditors will assess your formal revenue recognition policies. They need to see that you have a standardized, written process that your team follows consistently for every contract. Regular financial audits are key to avoiding revenue recognition errors, and a core part of that is checking if your policies are consistently applied and compliant with ASC 606. This ensures your policies accurately reflect the timing and amount of revenue you recognize. Your policy is the rulebook for your accounting team, and auditors want to make sure it’s complete and that everyone is playing by the same rules.
Supporting Calculations and Journal Entries
Auditors will trace your recognized revenue all the way back to its source, which means they’ll need to see the math behind the numbers. SaaS companies must ensure that their financial statements reflect accurate revenue recognition, which includes maintaining detailed supporting calculations and journal entries that align with ASC 606 requirements. Be prepared to provide clear documentation, like spreadsheets and system reports, that supports every number on your financial statements. This audit trail proves that your revenue figures aren’t just estimates but are based on concrete data and compliant calculations.
Proof of Internal Control Testing
Finally, auditors will evaluate the strength of your internal controls. These are the systems and processes you have in place to prevent and detect errors in your financial reporting. Auditors will evaluate the effectiveness of these controls to ensure they adequately support your revenue recognition process. This could include anything from requiring management approval on non-standard contracts to automated checks within your accounting software. Having robust assurance and tax accounting services in place demonstrates that your financial data is reliable and that you have a mature system for managing compliance.
Helpful Tools and Resources for ASC 606 Compliance
Handling ASC 606 doesn’t have to be a solo effort. While the standard is intricate for SaaS businesses, plenty of tools and resources can make compliance much smoother. From software that automates complex calculations to guidance from seasoned professionals, you can build a strong support system. These resources are a strategic part of your financial toolkit, helping you ensure accuracy, save time, and build a scalable compliance framework. Using the right combination of technology and expert advice helps you approach your audit with confidence.
Specialized Revenue Recognition Software
For most SaaS companies, managing ASC 606 compliance with spreadsheets is a losing battle. As you scale, manual tracking becomes not just inefficient but, as some experts say, “nearly impossible” without the right tools. This is where specialized revenue recognition software comes in. These platforms are built for subscription models, automating complex calculations for performance obligations, standalone selling prices, and contract modifications. An advanced revenue recognition module can save your finance team countless hours and significantly reduce the risk of human error, ensuring your financial statements are accurate and audit-ready.
Professional Consulting and Audit Services
Software is a powerful ally, but it can’t replace the strategic insight of a human expert. Partnering with a CPA firm experienced in the SaaS industry is a smart investment. These professionals act as advisors who can help you interpret the nuances of ASC 606 and establish robust internal controls. Regular financial audits are key to avoiding common revenue recognition errors. Having a team of experts you can turn to for assurance and tax accounting services provides peace of mind and ensures your financial reporting stands up to scrutiny.
Industry Guidance and Training Resources
Staying informed is critical for ongoing compliance. Fortunately, many high-quality educational resources are available, often for free. Major accounting firms publish detailed guides to help companies apply the standard to their specific industry. For instance, you can find a handbook on revenue for software and SaaS that breaks down exactly how to account for revenue under ASC 606. These guides are perfect for training your finance team and clearing up common misunderstandings. Making continuous learning a priority keeps your team up-to-date on best practices.
Common ASC 606 Mistakes SaaS Companies Make
Navigating ASC 606 can feel like walking through a minefield, but knowing where the common traps are is the best way to avoid them. Many SaaS companies, especially those growing quickly, stumble over the same few hurdles. From misinterpreting the rules to simply not having the right processes in place, these mistakes can lead to audit headaches and financial restatements. Let’s walk through the most frequent missteps so you can steer clear of them and ensure your revenue recognition is solid, compliant, and ready for auditor scrutiny.
Underestimating the Complexity
One of the biggest mistakes companies make is underestimating the complexity of ASC 606. It’s easy to glance at the five-step model and assume it’s a simple checklist, but the reality is much more nuanced, especially for SaaS. The standard requires a deep understanding of the various components involved in revenue recognition, from identifying distinct performance obligations in a bundled subscription to allocating transaction prices correctly. Treating ASC 606 adoption as a minor accounting update instead of a significant, cross-functional project is a recipe for trouble. It requires careful planning, robust systems, and a team that truly understands the standard’s demands.
Misunderstanding Revenue Recognition Timing
It’s a classic accounting principle, but one that frequently trips up SaaS companies: revenue should be recognized as the service is delivered, not when you get paid. SaaS businesses often struggle with when to recognize revenue, particularly with upfront implementation fees or annual subscription payments. For example, if a customer pays $12,000 for a year of service, you can’t book that entire amount in the first month. Instead, you must recognize $1,000 each month as you deliver the service. Confusing cash flow with revenue is a critical revenue recognition error that can materially misstate your financial performance and lead to major audit findings.
Overlooking the Impact of Contract Changes
SaaS business models are dynamic. Customers upgrade, downgrade, and add new services all the time. Each of these events is a contract modification that has implications for revenue recognition. Changes to contracts can significantly affect how you recognize revenue, and you must have a process to evaluate every single one. A simple upgrade might be treated as a change to the existing contract, while adding a completely new, distinct service could be treated as a new contract altogether. Ignoring these modifications or accounting for them incorrectly is one of the most common accounting problems in the SaaS industry and can quickly derail your compliance efforts.
Inadequate Documentation
If it isn’t documented, it didn’t happen—at least in the eyes of an auditor. Proper documentation is absolutely essential for ASC 606 compliance, yet many companies fall short. You need to maintain detailed records of your contracts, how you identified performance obligations, the judgments used to determine standalone selling prices, and your methods for allocating the transaction price. Without this trail of evidence, you can’t support your numbers during an audit. Strong documentation is the foundation of all SaaS accounting standards; failing to maintain it not only creates audit risk but also undermines the integrity of your financial reporting.
How to Maintain Ongoing ASC 606 Compliance
Passing your first ASC 606 audit is a major milestone, but compliance isn’t a one-time project. For a growing SaaS company, it’s an ongoing commitment. Your business is constantly evolving—you might launch new products, adjust pricing tiers, or modify contract terms. Each of these changes can impact your revenue recognition process. Staying compliant means building a sustainable system that adapts with your business.
Think of it as maintaining a house. You don’t just build it and walk away; you perform regular upkeep to ensure it stays in great shape. The same principle applies to your ASC 606 framework. By embedding compliance into your regular financial operations, you can keep your records audit-ready at all times. This proactive approach not only makes audit season less stressful but also provides you with more accurate financial data to make smart business decisions year-round. Here’s how you can maintain that momentum.
Review and Update Policies Regularly
Your revenue recognition policies shouldn’t be set in stone. As your SaaS business grows and your offerings change, your policies need to keep pace. Schedule time at least once a year—or whenever you introduce a significant change to your business model—to review your ASC 606 documentation. Do your policies still accurately reflect how you sell your products and services? Are your methods for determining standalone selling prices still relevant?
Regular reviews and internal financial checks are essential for catching potential issues early. This process helps you avoid revenue recognition errors and ensures the precision of your financial reports. A small adjustment to a policy today can prevent a major headache during your next audit.
Monitor and Test Continuously
SaaS companies face unique challenges due to their subscription-based models, multi-year contracts, and the complexities of adhering to strict accounting standards. Because of this, you can’t afford to wait until the annual audit to check if your controls are working. Implement a schedule for continuous monitoring and testing of your internal controls related to revenue recognition.
This could involve your internal finance team performing spot checks on new contracts each quarter to ensure they are being treated correctly. The goal is to identify and correct any deviations from your established policies in real-time. This consistent oversight demonstrates a strong commitment to compliance and gives auditors confidence in your financial processes.
Integrate Technology to Stay Audit-Ready
Let’s be honest: managing ASC 606 compliance manually is a recipe for errors. As one guide puts it, following the standard is “‘nearly impossible’ without the right software.” The complexity of SaaS revenue models, especially with bundled services and variable considerations, makes automation a critical component of a strong compliance framework.
Specialized revenue recognition software can automate complex calculations, manage contract modifications, and maintain a clear, accessible audit trail. By integrating technology into your process, you reduce the risk of human error and free up your finance team to focus on more strategic analysis. This makes you perpetually audit-ready and gives you a much clearer view of your company’s financial health.
Build a Strong Relationship with Your Auditor
Many companies underestimate the complexity of ASC 606, which can lead to significant compliance issues. That’s why your relationship with your auditor should be a year-round partnership, not a once-a-year interrogation. View them as a valuable resource who can provide guidance and help you stay on the right track.
Keep them informed about major changes in your business, like new product launches or shifts in your pricing strategy. Don’t hesitate to ask questions or seek their opinion on complex accounting scenarios before you implement them. Proactive communication builds trust and ensures there are no surprises when the audit begins. If you’re looking for a partner to help you stay ahead, our team at GuzmanGray is always ready to help.
Best Practices for a Smooth ASC 606 Audit
Passing your ASC 606 audit is more than just a compliance checkbox; it’s a sign of a healthy, well-run business. A smooth audit process builds confidence with investors, partners, and your own team. By adopting a few key practices, you can turn the audit from a stressful event into a valuable business exercise that strengthens your financial operations for the long haul.
Communicate Proactively
Think of your auditors as partners, not adversaries. Open, honest, and early communication is the single best way to ensure a smooth audit. Don’t wait for them to find potential issues. If you’ve signed a complex new contract, changed your pricing model, or have any gray areas in your revenue recognition, bring it to their attention yourself. Regular financial audits are key to avoiding revenue recognition errors. By providing clear documentation and being available to answer questions, you build trust and demonstrate a commitment to transparency. This collaborative approach allows you to work with your advisors to resolve issues before they become major problems.
Address Audit Findings Effectively
No company is perfect, and an audit might uncover areas for improvement. Instead of viewing findings as failures, treat them as actionable insights to make your business stronger. For example, an audit might reveal that your customer acquisition cost is unsustainable—a critical insight for long-term growth. If you’re paying $5,000 to acquire a customer who only brings in $4,000 in lifetime revenue, that’s not sustainable. When you receive audit findings, create a clear, documented plan to address each one. Assign responsibility to specific team members, set realistic deadlines for remediation, and follow up to ensure the changes are implemented correctly. This structured response shows auditors you take financial governance seriously and are dedicated to continuous improvement.
Create a Sustainable Compliance Process
ASC 606 compliance isn’t a one-time project you can forget about after the audit is over. The most successful SaaS companies build compliance directly into their daily operations. This means ensuring your processes for sales, contracting, and finance are all aligned with ASC 606 principles from the start. SaaS accounting ensures that the revenue, expenses, and metrics are tracked and reported in alignment with accounting standards like ASC 606. By leveraging technology and establishing clear internal controls, you can create a system that makes ongoing compliance a natural part of your workflow. This turns future audits into routine check-ups rather than disruptive, all-hands-on-deck emergencies.
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Frequently Asked Questions
Why is ASC 606 so much more complicated for SaaS companies? The main reason is that SaaS business models are built on ongoing relationships, not one-time sales. Your contracts often bundle multiple services—like software access, setup, and support—that are delivered over different periods. ASC 606 requires you to unbundle these promises, assign a value to each one, and recognize the revenue only as you deliver that specific service. This is much more complex than just booking the cash from a simple product sale.
What’s the first step I should take to prepare for an ASC 606 audit? Start with your documentation. Before you worry about anything else, gather all your customer contracts and create a clear, organized system for them. Your ability to prove compliance rests entirely on this paper trail. A strong documentation practice is the foundation for everything else, as it gives you and your auditors a clear view of the promises you’ve made to customers.
How do I determine the Standalone Selling Price (SSP) for services I never sell on their own? This is a common and tricky situation. Since you can’t use a direct price, you have to create a logical and consistent estimate. You could look at what competitors charge for similar services, calculate your costs plus a reasonable margin, or use a residual approach if you have other items with known SSPs. The key isn’t finding a perfect number but choosing a reasonable method, applying it consistently, and documenting your reasoning so an auditor can follow your logic.
Can I manage ASC 606 with spreadsheets, or do I really need special software? While you might be able to get by with spreadsheets in the very early days, it’s not a sustainable solution as you grow. The risk of human error is high, and tracking contract modifications, allocations, and deferrals across hundreds or thousands of customers becomes a massive headache. Specialized software automates these complex calculations, reduces risk, and provides a clear audit trail, saving your team an incredible amount of time and stress.
We just passed our audit. Does that mean we’re done with ASC 606 for a while? Not quite. Think of compliance as an ongoing process, not a one-time project. Your business is always changing—you might add new features, change pricing, or sign different types of deals. You need to regularly review your policies and test your internal controls to ensure they still align with your current business model. This continuous effort keeps you audit-ready and ensures your financial data remains accurate year-round.