Revenue recognition is a Generally Accepted Accounting Principle (GAAP) that specifies how businesses need to recognize revenue. Compared to non-subscription industries, separating actual income from deferred revenue is more difficult, and Recurly’s revenue recognition for subscription services makes this more manageable. Contrary to traditional business models where delivery happens at the moment of the transaction, revenue for subscription services is only recognized when the cash, per the contract, has been earned and not just collected. 

In a revision to improve financial statement reporting, the GAAP and International Financial Reporting Standards (IFRS) now require ASC 606 compliance for all companies. ASC 606 is a new revenue recognition standard that affects all businesses that enter into contracts with customers to transfer products or services.

What is ASC 606 and why does it matter?

The ASC in ASC 606 stands for “Accounting Standards Codification,” as defined by the Financial Accounting Standards Board, which is in charge of establishing best practices for GAAP accounting professionals and companies who follow these principles. 

The ASC 606 revenue recognition standard simplifies the way companies record revenue for contracts with their customers. This directly impacts recurring revenue businesses more than retailers, for example, who sell products and receive revenue in a one-time transaction. ASC 606 applies to non-profit, private, and public companies. When it comes to revenue recognition for subscription services, ASC 606 deals with the transfer of control, so revenue is recognized when a product or service with a contractual obligation to deliver is transferred to the subscriber.

The goal of ASC 606 is to create a consistent and repeatable experience in the preparation and execution of financial reporting. This new revenue recognition principle also improves comparative analysis and reporting for all businesses. Essentially, ASC 606 creates a clear revenue recognition standard that makes it easy for all companies to be consistent with accounting practices.

What are the five steps of the ASC 606 revenue recognition standard?

Companies complying with ASC 606 follow a five-step model for revenue recognition. 

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  1. Identify the contract. Is the contract entered into by the company with the customer come under the scope of the ASC 606 standard or it is just any other contract? This step also focuses on the enforceability of the contract which decides how and when the revenue will be recognized. 

  2. Identify the performance obligation. Performance obligations are the products or services that are agreed to be provided in the contract. In this step, define what the performance obligations are and whether they are dependent or not.

  3. Determine the transaction price. Calculate the transaction price of the contract and predict the total amount the company is entitled to receive from the customer, which may include non-cash transactions such as discounts, add-ons, and upgrades or downgrades.

  4. Allocate the transaction price to the performance obligations. The transaction price will be allocated among the performance obligations. In a contract with more than one product or service being provided, it’s important to distinguish the selling price of each product or service and the revenue or discount to be allocated to each product or service. Revenue recognition has different methods available for different circumstances to allocate the transaction price which includes revenue, discounts, etc.

  5. Recognize revenue as the performance obligation(s) is/are satisfied. In this step, decide how revenue will be recognized, such as over time versus a point in time.

The need for each step in the ASC 606 revenue recognition standard depends on the business, but this is a great baseline to follow for compliance. 

How does Recurly help businesses comply with ASC 606?

At Recurly, simplifying the complex is always the goal. Streamlining as much as possible to make necessary processes scalable and efficient is a huge contributor to subscription success, and partnering with the right platforms makes that even more feasible. With Recurly Rev Rec, we’re turning revenue recognition automation into reality for Recurly customers

Recurly Rev Rec stays updated with the latest changes in accounting standards, and with this acquisition, those automatic updates roll over to Recurly customers. As Recurly offers more and more flexibility in pricing models, there comes a greater need for revenue recognition automation. Recurly Rev Rec’s enhanced revenue recognition capabilities can simplify and help our customers comply with revenue reporting processes from ASC 606 and IFRS 15. 

Read more: Simplifying revenue recognition for companies with subscription and recurring revenue models

Recurly Rev Rec has become a truly all-in-one solution for subscription management, recurring billing, and revenue recognition for subscription services. Recurly customers can benefit from:

  • Lower costs and a streamlined tech stack

  • Improved revenue visibility, reporting accuracy, and predictability

  • Accelerated financial closes

  • Reduced compliance risks

  • Support for changing business and accounting requirements

To grow limitlessly, recurring revenue businesses must be ready to adapt to evolving revenue recognition principles quickly. Partnering with a subscription management and recurring billing platform like Recurly ensures that business standards are understood and met with the expertise that is vital to compliance needs. Grow faster, smarter, and stronger with Recurly. 

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