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Understanding ASC 606: A Startup-Friendly Guide to Revenue Recognition
- Brett J. Federer, CPA
- 5 days ago
- 4 min read
If your startup is beginning to operate at scale — or preparing for investor diligence — you’ve likely heard of ASC 606.
It’s one of those accounting standards that sounds more complex than it is. But it matters. And understanding it early can save you time, confusion, and cleanup later.
This article will walk through what ASC 606 is, why it matters, and how startups can begin preparing for it — without getting lost in technical overload.
What Is ASC 606?
ASC 606, formally titled Revenue from Contracts with Customers, is the accounting standard that governs how and when revenue is recognized.
It was introduced by the Financial Accounting Standards Board (FASB) to create a more consistent, transparent approach to revenue recognition across all industries. The core idea: revenue should be recognized when it’s earned — not necessarily when cash is received.
For example, if your startup offers a subscription service, ASC 606 says you should recognize revenue as access is provided, not all at once when the customer pays.
This distinction becomes especially important for SaaS companies, product bundles, or any business with multi-step contracts or recurring revenue.
The Five-Step Framework
ASC 606 uses a five-step model to determine how revenue should be recognized. Here's how it applies in practical terms:
1. Identify the contract with the customerAny agreement between your company and a customer — written, verbal, or implied — may be considered a contract. For example, a subscription acceptance page on your website likely qualifies.
2. Identify the performance obligationsWhat exactly are you delivering? A software subscription might include onboarding support, monthly access, and periodic feature updates — each could be treated as a separate performance obligation depending on your structure.
3. Determine the transaction priceThis is the total amount you expect to receive. Discounts, promotions, or potential refunds should all be factored in. If you offer a $120/year plan but discount it to $100 for year one, $100 becomes your transaction price.
4. Allocate the transaction price to the performance obligationsIf multiple obligations are involved, the transaction price needs to be fairly divided across them based on their standalone values.
5. Recognize revenue when each obligation is satisfiedThis means revenue is recognized over time or at a point in time — depending on how and when control is transferred to the customer. For a SaaS company, it’s typically recognized evenly over the subscription period.
Does ASC 606 Apply to All Startups?
Not necessarily.
If you’re still in pre-revenue mode or aren’t preparing GAAP-compliant financials, you may not need to apply ASC 606 just yet. But if your startup is generating revenue, pursuing investor funding, or aiming to improve financial transparency — it’s wise to get familiar with the framework early.
This guide is not a substitute for formal accounting review, but it’s a starting point to help founders understand where ASC 606 may fit into the bigger picture.
Why ASC 606 Matters (Even in Early-Stage Growth)
1. It improves investor confidenceInvestors want to know that your numbers reflect reality. Applying ASC 606, or at least being ready to, shows maturity in your financial reporting — and builds trust in your metrics.
2. It increases comparabilityUsing a standardized framework makes it easier to benchmark your performance against other companies in your space — especially in tech or SaaS.
3. It supports internal clarityFollowing ASC 606 forces you to define what you’re delivering and when — which strengthens contract terms, billing logic, and forecasting.
4. It protects against future reworkStartups that defer revenue incorrectly often need to restate financials down the line. Getting it right the first time saves time, cost, and credibility.
5. It prepares you to scaleThe more complex your product or contracts become, the more useful it is to have a scalable revenue process in place. ASC 606 gives you that structure.
How to Begin Preparing (Without Overcomplicating)
You don’t need to overhaul your accounting overnight. But there are a few smart steps you can take to start aligning with ASC 606:
Review your customer contractsIdentify where multiple obligations might exist and how revenue is being tied to them.
Document how you recognize revenue todayEven a simple internal walkthrough of your process helps spot areas of improvement.
Train your team on the basicsIf you have sales, operations, or customer success teams involved in deal structure, basic ASC 606 awareness goes a long way.
Talk to your accountantWhether you’re working with a bookkeeper or external advisor, make sure someone on your team understands the mechanics and can support proper reporting.
Decide if GAAP compliance is needed now or laterYou don’t have to adopt everything all at once — but you do want a clear stance on when it becomes a priority.
Final Thought
You don’t have to master ASC 606 right away. But you do want to know when it starts to matter.
If your startup is scaling, raising capital, or simply trying to get a better handle on how revenue moves — this standard is worth understanding. It’s not about checking a regulatory box. It’s about building a financial system that reflects reality, supports growth, and holds up when questions come.
If you’re not sure whether ASC 606 applies to your startup yet, that’s a conversation worth having.
Disclaimer: This post is for informational purposes only and does not constitute legal, tax, or financial advice. ASC 606 applicability depends on your business structure, financial reporting needs, and investor expectations. For help assessing your specific situation, consult a licensed accounting professional.
