ASC 606 is the accepted revenue standard in the US, and it is here to stay. It will affect all of your existing contracts with customers, and it promotes flexible and robust guidance through the entire process of revenue recognition and its changes that can affect the financial performance of a company.
But what exactly is ASC 606, and how does it apply to your business? This is what we’re tackling today.
Ready to learn more? In this guide, we’ll take you through:
WHAT IS REVENUE RECOGNITION?
Revenue recognition is an accounting principle that identifies the specific conditions under which a business can record a sale transaction as revenue. Only when revenue is earned, can it then be ‘recognized’. Revenue is typically recognized when a critical event occurs, such as the product being delivered to a customer, and the dollar amount is measured easily by the company.
WHAT IS ASC 606?
ASC 606 is the new revenue recognition standard affecting all businesses that enter into contracts with customers to sell goods or services. It is a recent change in standardized accounting principles for revenue recognition and the document explains in a step-by-step manner, how you should account for revenue earned from your business operations.
While the previous system was industry-specific, the new and improved structure is industry-neutral. Its goal is to encourage transparency in revenue recognition, address revenue issues when they pop up, and create a standardized ecosystem where all businesses can recognize revenue across multiple industries.
The term ASC stands for Accounting Standards Codification, defined by the Financial Accounting Standards Board.
FIVE STEPS TO ASC 606
When it comes to SaaS businesses, the payment for a promised service is made by the customer upfront, and this new ‘cash’ can only be considered as revenue as it is earned over the contract period of the customer.
ASC 606 has a simple 5-step process to ensure effective revenue recognition.
1. Identify contract with a customer
The first step outlines the criteria that needs to be met when establishing a contract with a customer to supply your services. Under ASC 606, a signed contract is not needed, but any contract can be valuable with enforceable rights and obligations.
Every contract has a few essential parts: