What Is ASC 606 Compliance?

ASC 606 is a compliance regulation that dictates that  a SaaS company’s financial statements need to reflect all actual business activities.  According to this rule, revenue is recognized when a good or service is delivered, irrespective of whether it is processed as an internal or external transaction.  This approach relates to accuracy, trustworthiness, and effectiveness to varying degrees. 

Concurrently, this can affect investor confidence, influence decision-making processes, and potentially lower the likelihood of fraudulent activities.  

ASC 606 is a single universal revenue recognition framework.  According to the regulation, revenue is recognized when the good or service is received by the customers.  

In some cases, this framework either delays or accelerates revenue recognition and this is because of specific reasons:  

• contract structure  
• delivery timing 
• pricing enhancements 

ACS 606 is a framework structured in 5 steps:  

1. The contract needs to be identified  
2. The performance obligations need to be assessed  
3. The transaction price needs to be determined  
4. The specific price needs to be allocated.  
5. Revenue is recognized when obligations are satisfied.  

Keep in Mind: There are situations in which SaaS companies need to perform various adjustments to the pricing strategy, contract type or service delivery structure.   

ASC 606 refers to several 収益認識 aspects, like: Assessing existing contracts  

• determining various obligations  
• estimating variable pricing structures  
• allocating payment value. 

It is important for SaaS companies to determine whether they act as the principal and report gross revenue or as the agent and report net revenue.  

Additional rules address:  

• contract modifications 
• licensing arrangements 
• intellectual property rights.  

The ASC 606 rule is universal, but its impact varies by industry.  

• The engineering and construction industries require the management of long-term contracts.  
• SaaS businesses have to consider the duration of the subscription and the included features.  
• Manufacturers may have problems with the recognition of revenue due to the fact that it is related to product usage or to the delivery process.  

Each industry must interpret the framework through its own contract structures and revenue models.  Regulatory consultation is often necessary to ensure correct application.

A SaaS company should evaluate the enforceability of the contract before signing it.  After that, it has to consider whether updates are to be treated as new contracts or changes to the existing one. 

Major project or price adjustments may need other accounting methods, while smaller adjustments are made within the existing process.  Contracts with flexible pricing need to be re-evaluated to assign the right value to the transaction.  The accounting implications of such modifications highly depend on how they affect the performance obligations.  

Implementing ASC 606 opens the door to various challenges.  These are: 

• Understanding how revenue should be recognized – over time or at a single point in time.  
• Considering bubbled performance obligations and customer incentives 
• Tracking all changes made to the contract 
• Altering existing systems to align with new requirements

Companies also have to include the total value of all the obligations that are not fulfilled or are only partially fulfilled in their accounts.  

This should be done using both a numerical table and an explanation of the delay. 

There are some exemptions in practice, such as contracts for a period of one year or less.  

These disclosures provide information on future revenue streams and committed transactions.