{"id":21725,"date":"2024-01-11T09:00:00","date_gmt":"2024-01-11T14:00:00","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=21725"},"modified":"2025-01-06T13:28:28","modified_gmt":"2025-01-06T18:28:28","slug":"expert-guide-step-by-step-revenue-recognition","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/expert-guide-step-by-step-revenue-recognition\/","title":{"rendered":"SaaS revenue recognition: a step-by-step expert’s guide"},"content":{"rendered":"
\n\t
\n\t\t
\n\t\t\t
\n\t\t\t\t\t\t\t
\n\t\t\t\t\t\t\t\t\t\t
\n\t\t\t\t\t\t\tStrategy, Legal & Operations<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t
\n\t\t\t\t\t

\n\t\t\t\t\t\tSaaS revenue recognition: a step-by-step expert’s guide\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t\t

\n\t\t
\n\t\t\t
\n\t
\n\t\t
\n\t\t\t\t\t\t\t
\n\t\t\t\t\t\n\t\t
\n\t\t\t\n\t\t\t\t\"david-appel-and-eric-sleeth\"\t\t\t\tDavid Appel & Eric Sleeth<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n

For SaaS CFOs, revenue has two equally crucial <\/strong>variables. First, you’re tasked with helping your company generate subscription revenue through superior strategic planning. But after that, you need to meticulously follow the revenue recognition process spelled out in ASC 606<\/strong><\/a>. <\/p>\n\n\n\n

In this revenue recognition guide, we’ll 1) Dive into the importance of ASC 606 in SaaS finance, 2) Discuss the role of your tech stack in avoiding revenue leakage, and 3) Walk you through the five steps of recognizing subscription SaaS revenue under ASC 606.<\/p>\n\n\n\n

You work hard <\/strong>to generate revenue, and we’re going to show you how to keep it from leaking away.<\/p>\n\n\n\n

What is revenue recognition?<\/strong><\/h2>\n\n\n\n

Revenue recognition is the process of accurately converting bookings into revenue for accounting purposes. Proper revenue recognition ensures transparent financial reporting and compliance with GAAP.<\/p>\n\n\n\n

The point of having a revenue recognition standard is to maintain a level playing field among subscription companies. If a customer pays you $1,000 for an annual SaaS subscription, your natural instinct might be to jot that full amount down as earned revenue.<\/p>\n\n\n\n

However, treating a subscription sale as a one-time revenue event allows companies to inflate their profits. It gives organizations an unfair competitive edge and can mislead investors. <\/p>\n\n\n\n

ASC 606 prevents that by implementing a standardized framework for gradually recognizing revenue.<\/p>\n\n\n\n

What is ASC 606?<\/strong><\/h3>\n\n\n\n

The Accounting Standards Codification 606 (ASC 606) is a global revenue recognition standard for recurring revenue companies. <\/p>\n\n\n\n

It was drafted by the Federal Accounting Standards Board (FASB) and came into effect in May 2014, and lays out a 5-step process<\/strong><\/a> that finance leaders are expected to use when converting bookings into revenue.<\/p>\n\n\n\n

We’ll be covering each step in more detail soon. In short, however, they encompass:<\/p>\n\n\n\n

    \n
  1. Contract identification<\/li>\n\n\n\n
  2. Clarifying performance obligations<\/li>\n\n\n\n
  3. Setting the transaction price<\/li>\n\n\n\n
  4. Allocating or itemizing the transaction price<\/li>\n\n\n\n
  5. Recognizing revenue as your service obligations are met<\/li>\n<\/ol>\n\n\n\n

    As you can imagine, applying this process across every single customer lifecycle <\/strong>is complex. SaaS revenue recognition has many moving pieces, and unfortunately, it’s pretty unforgiving of mistakes.<\/p>\n\n\n\n

    If you or someone on your team accidentally diverts from this framework, you’ll experience revenue leakage. In other words, you won’t be able to report whatever revenue falls outside the scope of ASC 606. <\/p>\n\n\n\n

    Luckily, you have a strong degree of influence over those risks.<\/p>\n\n\n\n

    Legacy accounting methods and revenue leakage<\/strong><\/h3>\n\n\n\n

    Legacy accounting is a particularly egregious offender for leaking revenue, impacting SaaS organizations’ bottom line and financial performance.<\/p>\n\n\n\n

    In a manual accounting department, financial data tends to be siloed. Teams and individuals update data and then share it with the rest of the group. <\/p>\n\n\n\n

    This spells disaster in terms of revenue leakage because revenue recognition calls for referencing and reconciling multiple data sources.<\/p>\n\n\n\n

    If you approach ASC 606 manually, some degree of leaked revenue is all but guaranteed. By contrast, cloud accounting software<\/strong><\/a> introduces a single source of truth, automating and centralizing revenue recognition for complete accuracy. AI also helps SaaS companies maintain clarity around deferred revenue waterfalls.<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    Now that you have more background on ASC 606 and SaaS revenue recognition, let’s get into the nuts and bolts. <\/p>\n\n\n\n

    What does each of the five steps entail?<\/p>\n\n\n\n

    Step 1: Identify the contract with the customer<\/strong><\/h2>\n\n\n\n

    The first step in SaaS revenue recognition is getting the contract between you and your customer ironed out. <\/p>\n\n\n\n

    What are they entitled to, and what are you entitled to in return?<\/p>\n\n\n\n

    ASC 606 provides a variety of contract stipulations that must be met. Some of the most important criteria are that:<\/p>\n\n\n\n