{"id":10286,"date":"2018-07-30T15:22:00","date_gmt":"2018-07-30T19:22:00","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=10286"},"modified":"2026-01-28T05:30:52","modified_gmt":"2026-01-28T10:30:52","slug":"asc-606-changes-for-private-saas-what-you-need-to-know","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/asc-606-changes-for-private-saas-what-you-need-to-know\/","title":{"rendered":"ASC 606 changes for private SaaS – what you need to know"},"content":{"rendered":"
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\n\t\t\t\t\t\tASC 606 changes for private SaaS – what you need to know\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

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The new ASC 606 accounting laws have organizations across the globe scrambling to restructure their revenue recognition processes. These recent changes affect the way your accounting team accrues commission expenses, requires adjustments to sales compensation plans, evaluates revenue, and handles contracts. Organizations that sell subscription software need to be particularly careful to ensure correct adoption.<\/p>\n\n\n\n

The current ASC 606 five-step process is as follows:<\/p>\n\n\n\n

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  1. Step One: Identify Contract<\/li>\n\n\n\n
  2. Step Two: Identify & Separate Performance Obligations<\/li>\n\n\n\n
  3. Step Three: Determine Transaction Price<\/li>\n\n\n\n
  4. Step Four: Allocate Transaction Price<\/li>\n\n\n\n
  5. Step Five: Recognize Revenue<\/li>\n<\/ol>\n\n\n\n

    There are many aspects of SaaS arrangements to consider: subscription services, implementation services, fees, service agreements, and consulting services. And with ASC 606 and the expected accounting treatment, currently it\u2019s pretty simple \u2013 all software revenue is recognized in tiers over the contract period.<\/p>\n\n\n\n

    So, if you have a client with a three-year subscription, and their annual fees are $7,000 for the first year, $9,000 for the second year and $11,000 for the third year, currently, the revenue is recognized evenly over the contract (in this case $9,000) But, with the existence of contingent revenue caps, at year one it caps the revenue at the $7,000 actually earned. The remaining $2,000 of continent revenue is not recognized under the current accounting guidance.<\/p>\n\n\n\n

    With the ASC 606 changes, the contingent revenue cap is no longer applicable. It would change year one to $7,000 with a contract asset of $2,000. Contract assets are money that is earned but cannot yet invoice for.<\/p>\n\n\n\n

    Here are three ways ASC 606 is challenging for the SaaS industry:<\/p>\n\n\n\n