ASC 606 was first announced nearly a decade ago. Why is the SaaS world still talking about it?
Well, for one, it’s perhaps the biggest change in accounting standards in about a century. Any kind of big change is hard, especially one that affects virtually every aspect of how a business runs.
The generally accepted accounting principles (GAAP) accounting standards codification (ASC) topic 606—or simply ASC 606 for short—was announced in 2014 as joint guidance from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).
“The [FASB] has redefined everything from revenue allocation to cost deferral,” explains Curtis Thompson, a director at Bridgepoint Consulting. “That means everyone in finance, accounting, sales, delivery, product management, and marketing has to change the way they think about revenue recognition—and how they work as a result.”
The most significant stipulation in the ASC 606 guideline is that revenue must be recognized only when performance obligations in the contract are met—not when the payment is received. This decision was to prevent businesses from reporting revenue they hadn’t actually earned yet.
And, given the ongoing nature of SaaS and many other subscription-based businesses that don’t sell physical goods, complying with this standard proves to be an ongoing challenge.
Ben Murray, the SaaS CFO, has previously noted that, in many of the businesses he’s spoken to, proper revenue recognition simply isn’t a priority. Many of these businesses hire accountants that aren’t familiar with the SaaS model and handle accounting on a cash basis—a model that recognizes revenue immediately.
“Most SaaS companies I have spoken with are incorrectly recording their most important revenue stream. That is SaaS subscription revenue and the corresponding deferred revenue balance,” Murray writes.
Benefits of revenue recognition automation
So, maybe there is a lot to still be talking about regarding the ‘new revenue recognition standard’. But if more businesses were to automate the process, there’d be a lot less to say.
Here’s how your subscription business may benefit from automating your revenue recognition processes.
1. Increased accuracy and consistency in revenue recognition.
If you know, you know. For subscription businesses, ASC 606 compliance can be tricky—and virtually impossible if the entire process is manual.
Automation turns the daunting project of recognizing revenue into a task you can set and forget. Simply tell your automation system how you’d like the revenue for a certain product to be recognized, and it’ll do the rest.
Automating the revenue recognition process records all transactions accurately and consistently, reducing the risk of human error and ensuring your financial statements reflect the true state of the business.
2. Improved compliance with ASC 606 regulations.
Nobody wants to deal with penalties. And ASC 606 non-compliance penalties can be hefty, ranging from fines to jail time.
But automation allows you to recognize revenue in a way that removes the possibility of human error and makes the task more manageable. Automated revenue recognition solutions are designed to ensure compliance with the ASC 606 regulations, reducing the risk of non-compliance and potential fines or legal action.
3. Reduced manual effort and errors in the revenue recognition process.
Automation eliminates the need for manual data entry and reduces the risk of data entry errors, freeing up time and resources for other important tasks and improving overall efficiency.
We talked a bit about error reduction back in point #1, but let’s take a moment to talk about the amount of time your accounting team can save when they aren’t recognizing revenue using such a highly manual process.
A report from PwC suggests businesses can reduce costs by up to 46% by eliminating inefficiencies across key finance processes.
Are there other, more strategic projects you can use your accounting team’s expertise on, instead? Are they external contractors who you could contract for fewer hours, freeing up more money to reinvest in your business?
4. Improved financial reporting and analysis.
Unrecognized revenue is a liability to your business. If it’s not being reported on properly, you run the risk of:
- Inaccurate financial statements: Deferred revenue is a critical component of a company’s financial statements. If the deferred revenue is not properly tracked, it can lead to inaccuracies in the company’s financial statements, which can undermine the company’s credibility and affect its ability to secure funding or attract investors.
- Misleading financial metrics: Properly tracking deferred revenue is essential for calculating important financial metrics such as revenue growth and profitability. If deferred revenue is not accurately tracked, these metrics can be misleading, making it difficult for the company to make informed business decisions.
- Cash flow problems: If a business doesn’t properly track deferred revenue, it can result in the company not having enough cash on hand to cover its expenses, pay its employees, or invest in growth opportunities.
- Noncompliance: Failure to properly track deferred revenue can also lead to noncompliance with accounting standards and regulations, which can result in legal and financial consequences.
Automated revenue recognition solutions keep track of your liabilities without needing you to lift a finger—completely eliminating the risks above. You’ll have access to real-time data and insights, enabling your business to make informed decisions and improve overall financial reporting and analysis. This can lead to more accurate forecasting and better decision-making in the future.
How to recognize revenue automatically
Whether your priority is to improve compliance, accuracy, reporting ability, or the sheer amount of time your accountants spend to recognize revenue, throwing automation into the mix is a game-changer.
When you have software that can automate the process, you’ll run through the first three steps of the ASC 606 framework as usual:
- Identify your contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
Step four—allocate the transaction price—needs to be done in your system only once for each product or service in your catalog. Decide at which point a performance obligation will be fulfilled, and note it in your system.
Step five—recognize revenue—takes what you set up in step four and automatically applies each time you create a new contract with a customer.
ASC 606-compliant SaaS billing software: Your new revenue recognition superpower
If one thing’s clear, it’s that complying with the ASC 606 revenue recognition standard is a lot of work. So, in some ways, I get why so many businesses aren’t properly complying.
But let’s be real. “It’s too hard” hasn’t been a good excuse since kindergarten. There are major consequences to ASC 606 non-compliance. No one wants to be charged with fraud.
The right fintech tools make revenue recognition a breeze. You can automate the tasks that, when done manually, would take days, be highly error-prone, and create unspeakable levels of stress. With an ASC 606-compliant recurring billing software, though, you can automate your:
- recurring billing and invoicing,
- receipt of payments, and
- revenue recognition according to any method—immediate, fixed interval, or milestone.
Complex tasks like recognizing revenue become something you can simply set and forget—and redirect your efforts to a more tactical, growth-promoting project.
