The ASC 606 revenue recognition standard affects entities differently as they have moved from implementation to applying and disclosing the effects on their financial statements. There are some common themes and questions for organizations in the software and software-as-a-service (SaaS) sectors to explore in our Technology Alert series.
The Financial Accounting Standards Board’s (FASB’s) ASC 606 revenue recognition standard was effective for annual reporting periods beginning after December 15, 2017, for public entities. For all other entities, it was effective for annual reporting periods beginning after December 15, 2018 (or after December 15, 2019 if financial statements had not been issued as of June 3, 2020).
The standard’s effect on the revenue and cost recognition models of technology entities has generally been significant. The fundamental principle at the heart of the standard is that an entity must “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
To help software and SaaS entities better understand this principle, these publications explore common themes related to the standard’s application.
The impact of adopting the ASC 606 revenue recognition standard on software and SaaS entities may have been greater than that on many other industry groups.
For example, the standard results in the elimination of the requirement for vendor-specific objective evidence of fair value. It also introduces potential difficulties in many areas, including:
Many of such challenges can require the use of significant judgments and estimates.
Further, software and SaaS entities have been significantly affected by the standard’s disclosure requirements, including the requirement for disclosures related to significant judgments and performance obligations (including disclosures commonly referred to as “backlog disclosures”).
These and other themes related to applying the revenue recognition standard for SaaS and software companies are explored in these publications.