ASC 606 stands for Accounting Standards Codification (ASC) as Topic 606: Revenue from Contracts with Customers.
ASC 606 is a new revenue recognition standard that has been put in place to improve the revenue recognition portion of financial statements and increase the consistency of financial reporting across industries.
Revenue recognition is a particularly important accounting principle for subscription-based businesses. It determines the specific conditions under which income becomes recognized as revenue. Simply put, under ASC 606 revenue must be recognized as and when its value is received by customers.
Existing revenue recognition guidelines are inconsistent across industries and between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). These guidelines also fail to address certain types of arrangements.
The new ASC 606 revenue recognition standard is aimed at reducing or eliminating those inconsistencies, which will improve comparability and eliminate gaps. This new standard will also include improved disclosure requirements and provide businesses with a more robust framework for addressing revenue issues.
The ASC 606 standard is applicable to companies in the U.S. It took effect for public companies on January 1, 2018 and for private companies on January 1, 2019. Adopting ASC 606 means software as a service (SaaS), internet of things (IoT), and any other subscription-based businesses must recognize their revenue in a way that’s compliant, which requires the ability to track their earned and deferred revenue over the entire period of their subscriptions.
For example, when subscribers make mid-term changes, it will be necessary to recognize revenue appropriately before the change and have any new revenue recognition requirements take hold after the change takes place.
Understanding the importance of revenue recognition isn’t just about compliance. There are several situations where accurate revenue recognition can help a subscription business operate more efficiently.
For example, subscription businesses tend to bill customers for services rendered over time. Sometimes this means a yearly payment, while other times there are monthly payments. However, in order to remain in compliance with ASC 606, revenue from these yearly or monthly payments cannot be immediately recognized. Instead, a portion of each payment must be deferred over the course of each subscription period until the business has delivered the service in full.
Deferred revenue can be categorized as a liability because businesses are obligated to provide users with a service for the length of the agreed upon subscription period.
Accurate deferred revenue accounting also helps subscription businesses deal with instances where a customer cancels early or switches to a different plan mid-cycle. Separating deferred revenue and earned revenue helps businesses credit or return the correct portion of a monthly or yearly payment in the event of a change.
Additionally, some subscription businesses offer products and services accessed with a one-time payment. For example, some music streaming services have users pay a monthly fee for access to a limited music library. To access songs or albums not included in the library, customers pay a one-time fee. This is revenue that must be recognized immediately.
Subscription-based business can involve complexities of many kinds regarding revenue recognition. A fundamental challenge is accurately tracking contracted, recognized, and unbilled deferred revenue.
For example, should revenue from non-refundable upfront fees be recognized now or deferred until later? How should the revenue from evergreen subscriptions be recognized over time? And how do you determine the transaction price if your subscriptions involve usage-based pricing?
As discussed, mid-term subscription changes present an even bigger challenge in terms of ASC 606 compliance. These changes involve a complex process of altering settings to replace one plan with another, accompanied by a whole slew of accounting adjustments.
Charges may need to be prorated, charges may need to be cancelled or partially reversed on the old subscription, and changes need to be made to the ledger to reflect deferred and earned revenue, as well as tracked monthly recurring revenue contraction and expansion. It can easily become overwhelming.
As subscription-based businesses endeavor to meet the new ASC 606 revenue recognition standard, they may shy away from potentially lucrative revenue opportunities for fear of falling out of compliance. New pricing models and innovative contract designs may be put on the back burner, which could result in these businesses trailing behind their competitors and the demands of the market.
Failing to bring your business’s accounting standards in line with ASC 606 is a huge risk that can result in numerous consequences—mostly stemming from inaccurate reporting. Businesses may have to incur the cost of restating earnings, which could lead to not only a blemished reputation, but potentially also audits, firings, and even litigation.
Becoming ASC 606 compliant requires a lot of research and planning, and it can take valuable human resources away from running a business. If your team has yet to get started on becoming ASC 606 compliant, you shouldn’t underestimate the enormity of this undertaking.
When embarking on the process of working toward ASC 606 compliance, businesses shouldn’t wait until the end of the project to get feedback from their auditor. They should also be sure to consider various other stakeholders who may be relevant to their compliance planning. For example, if your business uses the rate of technological obsolescence to determine its amortization periods, consider involving a team member from engineering or product development.
Finally, if your business is used to working with legacy financial processes, it may be tempting to continue using manual methods and Excel spreadsheets to determine how your revenue should be capitalized and amortized. But this isn’t a practical solution over the long term.
Consider leveraging software to automate the process and help your business move into compliance.
Fusebill is an automated billing and subscription management platform that enables businesses to maximize their revenue and scale their operations. Fusebill supports the revenue recognition requirements laid out in ASC 606 for recurring revenue and can help any subscription business become compliant.
Fusebill enables all the pieces of a subscription agreement to be broken into separate parts that can each receive a value and a revenue recognition schedule. This schedule determines how and when revenue gets recognized, so staying compliant with the ASC 606 revenue recognition standard is automatic.
Again, one of the biggest obstacles to becoming ASC 606 compliant is handling mid-term subscription changes. And making changes manually to a subscription is an extremely complex and time-consuming process. With each change, settings need to be switched to initiate the replacement of one plan with another. There are also accounting adjustments that need to happen, such as proration of charges on the new subscription, cancellation of, or partial reversal of, charges on the old subscription, ledger movements for deferred and earned revenue, and tracking MRR contraction and expansion.
Fusebill's plan upgrade/downgrade capability—which is one of the best in the industry—automates the entire process and gives your business the power and flexibility to satisfy your customers’ needs. And because Fusebill automatically takes care of the backend, customers can adjust their own subscriptions through Fusebill's self-service portal.
Research has shown the average customer will make four mid-term plan changes during their subscription. This means you need your revenue recognition calculations to sync seamlessly and automatically with each adjustment.
The ability to recognize your revenue automatically and accurately enables you to remain compliant with the new ASC 606 standard and have access to an accurate real-time revenue picture. Fusebill's revenue recognition dashboard display shows deferred and earned amounts at any given time, giving you real-time access to the information you need to make the best decisions for your business.
Fusebill's robust platform has a low entry-price because smaller organizations need to get started on the right foot without having to overspend for capabilities they don't use right away. This means the Fusebill platform scales with the needs of your organization over time. Smaller businesses need a competitive advantage, if not more than larger businesses, which is why all pricing packages include a full-feature set of capabilities.
Fusebill is the industry leader in simplifying revenue recognition, and its agile platform automates and manages all your business’s subscription billing activities. The software is easy to deploy, easy to use, and it’s priced better than the competition.
Let Fusebill take ASC 606 revenue recognition compliance off your to-do list.
Uberflip’s customer invoicing requirements are high volume and steadily growing. With over 1600 subscription customers and multiple subscription packages for them to choose from, their subscription management and billing requirements were becoming unmanageable with their manual process.
ClearPathGPS’ customer billing requirements are highly customized and high volume. They are a no-contract provider which means they need to prorate subscriptions to the day and there can be hundreds of plan adjustments daily. Not only is this a cumbersome process but it is a complex one that required a flexible solution.
instream has reduced their registration and billing process time by 80%. See how Fusebill saves them time and money allowing them to focus on other strategic areas of the business.
NonProfit Technologies (NPT) had experienced tremendous growth at an early stage, scaling their customer base by 500% within the first 2 years of business. Fusebill helped to fuel that growth by automating their billing, allowing NPT to focus on other important areas of their business.