Page 22 - Business Insights Technology Industry

HOW ASC 606 IMPACTS
TECHNOLOGY COMPANIES AND BUNDLED SERVICES: CONSTRAINTS ON VARIABLE
SAAS SOFTWARE PROVIDERS Contracts often involve bundled services CONSIDERATION:

or multiple deliverables, such as software Companies must assess whether there
licenses, implementation services, training, is a significant reversal of cumulative
and ongoing support. Each of these elements revenue recognized if there are significant
may represent separate performance uncertainties related to variable consideration.
obligations that need to be accounted for If so, they may need to recognize revenue
individually under ASC 606. only to the extent that it is highly probable
that a significant reversal will not occur.
DISTINCTIVE ELEMENTS:
TIME VALUE OF MONEY:
ASC 606 requires careful consideration of
whether promised goods or services are If the contract includes a significant financing
distinct within the context of the contract. component (e.g., where payment terms exceed
This assessment involves evaluating the the normal payment cycle), the transaction
customer’s ability to benefit from each item price should be adjusted to reflect the time
independently and whether the items are value of money.
interdependent or significantly integrated
with other promised goods or services. 4. ALLOCATE THE
TRANSACTION PRICE:
I n today’s fast-paced technology- THE FIVE-STEP MODEL OF ASC 606 CUSTOMIZATION AND INTEGRATION: If a contract includes multiple performance
driven economy, adhering to stringent
financial standards is crucial for ASC 606 introduces a structured five-step Services that require significant customization obligations, the transaction price must be
sustaining growth and ensuring transparency. approach to revenue recognition: or integration efforts may be considered as a allocated to each obligation based on its
The adoption of Accounting Standards single performance obligation if they are not standalone selling price. This step ensures
Codification (ASC) 606 by the Financial 1. IDENTIFY THE CONTRACT: separately identifiable from other promises in that revenue is recognized appropriately for
Accounting Standards Board (FASB) the contract. each distinct element of the contract.
has brought about significant changes in The first step involves determining whether a
RECOGNIZE REVENUE AS
how revenue is recognized, presenting both contract exists between the company and the 3. DETERMINE THE 5. PERFORMANCE OBLIGATIONS
challenges and strategic opportunities for customer. This includes identifying the rights TRANSACTION PRICE: ARE SATISFIED:
businesses in the technology and Software and obligations of each party, such as payment
as a Service (SaaS) sectors. Startups tend terms and performance commitments. Once performance obligations are identified, Revenue is recognized when (or as) the
to struggle with implementing ASC 606 due the next step is to determine the transaction
to its complexity, convoluted nature, and 2. IDENTIFY PERFORMANCE price. This involves estimating the amount of company satisfies a performance obligation
nuances. Below we try to put some fences OBLIGATIONS: consideration the entity expects to receive in by transferring control of a promised good or
around an accounting standard that is difficult exchange for transferring the promised goods service to the customer. This can occur over
to wrangle. Once a contract is identified, the next critical or services to the customer. time (e.g., during ongoing service provision
step is to identify the distinct goods or services in SaaS models) or at a specific point in time
UNDERSTANDING ASC 606 promised to the customer. A performance FIXED VS. VARIABLE CONSIDERATION: (e.g., upon delivery of software licenses or
obligation is defined as a promise in a contract physical goods).
ASC 606, officially titled Revenue from with a customer to transfer a good or service The transaction price may include fixed
Contracts with Customers, represents to the customer. amounts, variable amounts (such as
a comprehensive framework aimed at discounts, rebates, or performance bonuses),
standardizing revenue recognition practices or a combination of both. ASC 606 requires
across industries. Its primary objective is to companies to estimate variable consideration
ensure revenue is recognized when goods using either the expected value method
or services are transferred to customers in (probability-weighted average) or the most
amounts that reflect the consideration the likely amount method (single most likely
entity expects to receive. amount).

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