5 steps to mastering revenue recognition for SaaS
Unlock the secrets of ASC606 and IFRS15 compliant revenue recognition for SaaS companies with these expert tips.
Revenue is the ultimate measure of performance for the private sector. For many companies, it’s relatively simple to track. But in the SaaS world, the task of revenue recognition can be more complex thanks to the sector’s fast-paced growth, multiple subscription and usage-based models, and the need to account for different entities or geographies.
The complexity is exacerbated for many by their reliance on manual or siloed processes. Unlike Sage Intacct, entry-level tools like QuickBooks, which are often used by companies just starting out, lack the scalability and multi-dimensional reporting capabilities that growing SaaS businesses need. Teams have to manually collect data from the platform, even for simple tasks like everyday reporting.
Revenue recognition dictates when and how a company records its revenue on its financial statements—i.e., when the revenue was actually earned, not when the contract was signed or the cash was received. Accurate revenue recognition not only reveals a business’s financial health, but is also legally required under accounting standards such as ASC 606 and International Financial Reporting Standards (IFRS) 15.
What are ASC 606 and IFRS 15?
Under ASC 606, which took effect in 2017, revenue is recognized when the delivery of promised goods or services matches the amount expected by the company. It was designed to prevent premature or delayed revenue recognition, which can distort financial performance figures.
When companies adhere to ASC 606, it gives investors, analysts, and other stakeholders a more accurate picture of company performance, allowing them to compare financial statements across different companies. For SaaS businesses seeking funding or preparing for an IPO, it’s essential.
IFRS 15 was passed in 2018. It’s a revenue-recognition standard that applies to public, private, and nonprofit entities. Like ASC 606, it aims to streamline the way businesses report the nature, amount, and timing of contracts with customers. However, there are a few differences between the two, particularly around collectability thresholds, contract cost capitalizations, sales taxes, and license renewals.
The five steps
So, what are the five steps to compliant revenue recognition for SaaS companies?
Step 1: Identify the contract with a customer
First, you need to establish the criteria for entering a contract with a customer. This involves agreeing on the terms of the contract, which will include payment, the delivery of goods and services, and the consequences if any obligations aren’t met.
Step 2: Pin down the performance obligations
Once a contract is in place, it’s important to outline the specifics of what is included in the agreement, such as software access, implementation help, training sessions, and/or custom integrations.
Step 3: Determine the transaction price
Next, you’ll need to assess the revenue you’ll receive in exchange for your services. This isn’t just about the price; it includes discounts, return policies, additional fees, and payment timing. All of these factors will influence how and when you recognize revenue.
Step 4: Allocate the transaction price
Once you’ve identified the transaction price, you’ll need to allocate portions of it to each performance obligation within the contract. For example, part of the price might be allocated to software implementation, part to staff training, and part to ongoing support.
Step 5: Recognize revenue once your firm satisfies a performance obligation
Revenue is recognized when control of the promised goods or services is transferred to the customer. This should only occur once the transaction is complete and your performance obligation is fulfilled. For example, if a customer pays upfront for a six-month subscription, one-sixth of the revenue should be recognized in each month of the contract.
Revenue recognition best practices
Of course, there’s more to revenue recognition than simply knowing how and when to record it. Here’s how to ensure you’re staying compliant with ASC 606.
Provide regular training to the team
Your team also needs to understand the intricacies of revenue recognition, especially as your business model evolves and grows.
Before entering a new market or introducing a new subscription model, ensure that your team is fully up to speed, has had the opportunity to ask questions, and has adjusted their processes accordingly.
Keep on top of revenue analysis
It’s vital that your finance team captures any revenue adjustments as they happen. These may involve customer churn, contract modifications, and how revenue is allocated for bundled services. By keeping a close eye on things, you’ll also be quick to spot revenue leaks and opportunities for growth.
Subtract bad debts and discounts
If a customer fails to pay, this should be transferred from receivables to “written off” or bad debts and removed from your revenue numbers. Similarly, discounts under ASC 606 constitute a separate performance obligation and should be tracked as such.
Stay up to date
Revenue recognition guidelines and requirements can change or differ depending on the region you’re operating in. Ensure you stay up to date with changing requirements, document them, and share that knowledge with the rest of the team.
Automate revenue recognition
Automation can help you take the complexity out of revenue recognition. The right software solution enables you to track various revenue streams, automate allocations and calculations, and remain compliant with standards like ASC 606 and IFRS 15. You’ll be able to produce audit-ready reports easily and attach supporting documents directly to transactions.
Conclusion
At Sage, we know that accurate revenue recognition is not only a key compliance consideration for scaling SaaS businesses, but it’s also critical for their success. In fact, we were voted #1 by your peers in The SaaS CFO’s 2025 Tech Stack Survey and the G2 Grid for Enterprise Revenue Management.
That’s why our experts are always ready to offer you advice and support. Getting revenue recognition right leads to greater financial transparency, better informed decision-making, and enhances your ability to build trust with stakeholders.
With the right technology, compliance with regulations like ASC 606 transforms from a challenge into an opportunity. By taking a structured approach, you can simplify and improve your reporting capabilities now and in the future.
Ready to learn more about modernizing your finance function? Download our best practice guide to future-proof billing and revenue recognition.
