ASC 606
ay-ess-see six-oh-six
The US accounting standard for revenue recognition. Five steps that determine when and how you can count revenue as earned.
ASC 606 is the revenue recognition standard issued by the Financial Accounting Standards Board (FASB). It replaced ASC 605 in 2018 and applies to all US companies that follow GAAP. The standard defines a five-step process for recognizing revenue.
The five steps: (1) Identify the contract with the customer. (2) Identify the performance obligations in the contract. (3) Determine the transaction price. (4) Allocate the transaction price to the performance obligations. (5) Recognize revenue when each performance obligation is satisfied.
For a simple SaaS subscription, this is straightforward: one contract, one performance obligation (access to the software), one price, recognized monthly as the service is delivered. For complex deals with software, professional services, training, and usage-based pricing, ASC 606 requires careful allocation of revenue across each component. This is where SaaS accounting gets complicated and why companies hire revenue accountants earlier than they expect.
Examples
ASC 606 for a simple SaaS subscription.
A customer signs a $120k/year SaaS contract. One contract, one performance obligation (software access), $120k transaction price. Revenue recognized evenly: $10k/month over 12 months. Simple.
ASC 606 for a complex enterprise deal.
A $500k deal includes $300k/year in software, $100k in implementation services, and $100k in training. ASC 606 requires allocating revenue to each obligation. Software: $300k recognized over 12 months ($25k/month). Implementation: $100k recognized as milestones are hit (3 months). Training: $100k recognized when delivered (1 month). Three different recognition schedules from one contract.
ASC 606 and usage-based pricing.
A customer signs a $200k annual commitment with usage-based overages. The $200k minimum is recognized ratably ($16.7k/month). Overages are recognized as consumed. If the customer uses $50k in overage in March, that $50k is recognized in March. The base commitment and variable usage have different recognition patterns.
In practice
Read more on the blog
Frequently asked questions
When does ASC 606 matter for startups?
Immediately, even if you are not audited yet. Getting revenue recognition right from the start avoids painful restatements later. Investors will ask about your revenue recognition policies during due diligence. Series B and later investors often require audited financials, which means ASC 606 compliance. Start correctly and save yourself the headache.
Do I need a revenue accountant for ASC 606?
If all your contracts are simple monthly or annual SaaS subscriptions with no professional services, your general accountant can handle it. Once you have multi-element arrangements (software plus services), variable pricing, or multi-year contracts with annual price escalators, hire a revenue accountant or use specialized software like Zuora or Chargebee.
Related terms
The accounting rules for when you can count revenue as earned. Not when you sign the deal or collect the cash, but when you deliver the service.
Cash collected for services not yet delivered. A liability on the balance sheet that converts to revenue as you fulfill the contract.
Bookings is what you sold (total contract value when signed). Revenue is what you earned (recognized over the delivery period). They are never the same number.
The total value of contracted revenue not yet recognized. Includes deferred revenue plus unbilled contracted amounts. A measure of future revenue visibility.
Want the complete playbook?
Picks and Shovels is the definitive guide to developer marketing. Amazon #1 bestseller with practical strategies from 30 years of marketing to developers.