SaaS Revenue Recognition & ASC-606

SaaS Revenue Recognition & ASC-606

In 2020, the Financial Accounting Standards Board (FASB) issued relief to private companies that had not adopted ASC-606. As a result, the new deadline for private companies to adopt ASC-606 accounting standards is now December of 2021. 

Adopting the new standards has been a challenge for everyone, but especially for rapidly-growing companies who may not have the resources needed to understand, adopt, and maintain the new standards. 

The fact is that maintaining adherence to ASC-606 is nearly impossible without the right software. That’s why SaaSOptics created an advanced workflow specifically dedicated to this task.

In this article, we’ll teach you what’s required to adopt and maintain ASC-606 compliance, and how our advanced workflow, RevenueBooks, will prevent this process from becoming a pain in the SaaS.

The 5 Steps of ASC-606 Adoption

At a high level, there are 5 steps you need to take every time you sign on a new customer in order to maintain ASC-606 compliance. They are as follows:

Step 1: Identify the contract(s) with a customer

Step 2: Identify the performance obligations in the contract

Step 3: Determine the transaction price

Step 4: Allocate the transaction price to the performance obligations in the contract

Step 5: Recognize revenue as the performance obligations are satisfied

What makes maintaining compliance tough for B2B SaaS companies with complex, sales-negotiated contracts is that the price listed on your sales order or contract may not always equal the price used for revenue recognition. Unfortunately, revenue recognition gets messy when you start introducing variable pricing, discounts, credits, and early termination clauses. 

With added complexity comes a high risk of human error (not to mention lots of time spent in tedious, repetitive tasks). The key to maintaining successful compliance and saving your team a ton of time is automation. That’s where RevenueBooks comes in.

RevenueBooks automates the complex process of reallocating your total contract price to each performance obligation. With flexible, easy-to-use formulas, RevenueBooks makes calculating stated, standalone selling prices a breeze. 

Let’s take a closer look at the steps involved in ASC-606 adoption, and how RevenueBooks can help.

Step 1 & 2: Identify the contract(s) with a customer & Identify the performance allocations in the contract

According to the FASB glossary, a performance obligation is a contractual promise to transfer a distinct good/service or a bundle of goods/services. Performance obligations can either be explicit or implicit, and it’s up to human judgment to determine which category a performance obligation fits into. You likely have a performance obligation if you would reasonably expect a customer to pay for a single promise if it were separated from the rest of the contract. Companies often hire outside consultants to help them define performance obligations to ensure they’re defensible to auditors. 

Step 3 & 4: Determine the transaction price & Allocate the transaction price to the performance obligations in the contract

To comply with ASC-606, companies need to show they have consistent and controlled methods of re-allocating revenue to performance obligations based on their standalone selling price.  

After you’ve identified the specific performance obligations, SaaSOptics’ RevenueBooks module allows you to establish and enforce specific rules (formulas) for re-allocating your total contract price to those performance obligations. 

Allocations in RevenueBooks can be performed through a variety of methods. For example, you can assign specific amounts, carve out a part of one obligation’s price and allocate it to another, or simply use a dynamic formula to perform the needed calculation. Carve-outs come into play when an item is not listed in the contract (explicit performance obligation), but may be buried in the terms & conditions or is a generally accepted business practice provided to your customers (implicit performance obligation). This can be useful when you sell a single item, such as a software subscription, and you only list that subscription on your order, but you’re required to allocate part of that subscription to the ongoing support services you provide in the contract.

Step 5: Recognize revenue as the performance obligations are satisfied

Once you’ve reallocated the price, all that’s left is to recognize revenue. In the following example, a SaaS company has worked with their auditor to more accurately reflect the source of revenue. As a result, they need to reallocate some of their existing recognized revenue from the “subscription” item to the “support” item. 

While the company only listed a single subscription item on their contract, utilizing RevenueBooks made ASC-606 compliance easy. They could allocate revenue to subscriptions, support, and installation to create a more accurate representation of their financials.

SaaSOptics Helps You Maintain ASC-606 Compliance

The above scenario illustrates how RevenueBooks, an Advanced Workflow in the SaaSOptics platform, enables you to migrate from the old (ASC-605) to new (ASC-606) standards and maintain compliance moving forward. With RevenueBooks, ASC-606 compliance doesn’t have to be a thorn in your company’s side! Talk to someone at SaaSOptics today about how RevenueBooks can help your business.

Want more tips for ASC-606 adoption? Check out this recording of our latest webinar on practical ways to adopt ASC-606.

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