ASC 606 decides when revenue appears in your income statement. When the cash arrives is a separate question.
The standard gives a five-step framework that many US companies follow. If you sell subscriptions or services, performance obligations and contract modifications are the two parts that will cost you time.
The five steps
Identify the contract, identify the performance obligations, determine the transaction price, allocate that price across the obligations, then recognize revenue as each one is satisfied.
One customer contract can hold several obligations: software access, implementation, support, hardware. Each is recognized on its own timeline.
- Step 1: identify the contract with the customer
- Step 2: identify the distinct performance obligations
- Step 3: determine the transaction price
- Step 4: allocate the price across the obligations
- Step 5: recognize revenue as each obligation is satisfied
Subscriptions and setup fees
SaaS access is usually recognized evenly across the subscription term, because the customer consumes it continuously. A setup fee may be distinct or bundled, depending on whether you have evidence of a standalone selling price.
Usage-based components need an estimate at the start and a true-up once actual usage is known.
Deferred revenue and contract assets
Cash collected before the revenue is earned sits on the balance sheet as deferred revenue. A rollforward each period is how you check billing and recognition still agree.
A contract asset arises when you recognize revenue before you are permitted to invoice. Long implementation projects produce these regularly.
What it means operationally
Finance, sales and legal should agree standard contract terms that map cleanly onto your accounting policy. Anything non-standard gets reviewed before signature, rather than after.
Use systems that hold billing events, contract metadata and revenue schedules together. A spreadsheet doing this is a restatement waiting to happen.
Written by the team at Ambivo, a business platform that keeps CRM, accounting and ERP on one customer record. This article is general guidance on the topic rather than a description of Ambivo features.