ASC 606 for SaaS startups: the 5 steps with a worked example
ASC 606 is the US accounting standard that says to recognize revenue when you deliver what you promised, in the amount you expect to be paid. It has five steps: identify the contract, identify the performance obligations, determine the price, allocate the price to each obligation, and recognize revenue as each one is satisfied. For a SaaS subscription, that means spreading the fee evenly over the access period.
Updated · 5 min read · By the Accountable team
The short version
- ASC 606 applies five steps: identify the contract, the performance obligations, the transaction price, the allocation and the recognition.
- PwC's guide says a promise to give access to a SaaS platform typically meets the test for a series of distinct services, recognized over time.
- Onboarding is a separate obligation only if it is distinct from the software, and the answer changes when you recognize the revenue.
- Sales commissions that you expect to recover are capitalized, unless the amortization period is one year or less.
- A prepayment within a year of service needs no financing adjustment, because FASB's practical expedient covers periods of one year or less.
ASC 606 recognizes revenue as you deliver what you promised
FASB's core principle is that a company recognizes revenue to show the transfer of promised goods or services to customers, in the amount it expects to be entitled to in exchange. The standard is Topic 606 of the FASB Accounting Standards Codification, issued as ASU 2014-09, and it replaced most older industry-specific revenue rules.
It matters to a startup when you keep accrual books for investors, lenders or an audit. A startup with cash-basis books records revenue when money arrives and does not apply it.
The five steps, each with a SaaS example
| Step | What the standard asks | SaaS example |
|---|---|---|
| 1. Identify the contract | An agreement that creates enforceable rights, with approved terms, a payment term and a probable collection | A signed order form for 12 months |
| 2. Identify the performance obligations | Each distinct promise to transfer a good or service | Access to the platform; maybe onboarding |
| 3. Determine the transaction price | What you expect to be entitled to, with variable amounts estimated and constrained | $27,000 after a 10% discount; usage overages estimated carefully |
| 4. Allocate the price | Split by relative standalone selling price | $21,600 to the subscription and $5,400 to onboarding |
| 5. Recognize revenue | When or as each obligation is satisfied | Subscription monthly; onboarding as delivered |
The wording comes from FASB's summary of ASU 2014-09, and BDO's guide describes the same five steps.
A $27,000 deal with onboarding shows the allocation
A customer signs on January 1 for a 12-month subscription and an onboarding package that trains its team. List prices are $24,000 for the subscription and $6,000 for onboarding. You give a 10% discount, so the customer pays $27,000.
Step 3, transaction price: ($24,000 + $6,000) × 90% = $27,000.
Step 4, allocation by standalone selling price: subscription 80% × $27,000 = $21,600; onboarding 20% × $27,000 = $5,400.
Step 5, subscription: $21,600 ÷ 12 months = $1,800 a month.
Step 5, onboarding: $5,400 when the training is delivered, say in January.
January revenue: $1,800 + $5,400 = $7,200. February to December: $1,800 a month. Total: $7,200 + 11 × $1,800 = $27,000.
The discount is spread across both obligations in proportion to their standalone prices, which is the default in the standard. FASB allows a discount to go to one obligation only when it relates entirely to that obligation.
Whether onboarding is a separate obligation changes the timing
PwC's guide says the answer depends on the activity. Work that sets up your own platform or trains your own staff is a cost of fulfilling the contract, not a promise to the customer. Work that changes the customer's systems or trains the customer's people is likely a promise to the customer. A promise is then a separate obligation only if it is distinct: for example, the customer could have another vendor do it, you sell the SaaS without it to others, and it does not change the software's function.
If onboarding is not distinct, it combines with the subscription into one obligation, and the whole $27,000 is recognized evenly over the year.
| Conclusion | January revenue | Each later month | Total for the year |
|---|---|---|---|
| Onboarding is distinct | $7,200 | $1,800 | $27,000 |
| Onboarding is not distinct | $2,250 | $2,250 | $27,000 |
Total revenue is the same. The difference is timing, and it moves profit between months. Decide once, write down why, and ask your CPA when a contract is unusual.
Commissions, discounts and prepayment have their own rules
- Commissions: the incremental cost of obtaining a contract that you expect to recover is capitalized as an asset and expensed over the period the customer benefits. As a practical expedient, you may expense it when incurred if the amortization period is one year or less. A 10% commission, or $2,700, on this one-year deal may be expensed at signing if the customer's benefit period is one year or less.
- Variable consideration: usage fees or credits are estimated, and included in the price only to the extent a significant reversal of revenue is unlikely. A customer who can earn a service credit makes the price uncertain.
- Financing: a customer who pays a year ahead receives a benefit of financing in theory, but you need not adjust when the gap between payment and service is one year or less.
- Termination rights: PwC notes that only the non-cancellable term counts, so a month-to-month contract with 30 days' notice counts about one month of fees.
What the entries look like in the books
After the allocation, the bookkeeping is ordinary. Payment of $27,000 goes to cash and deferred revenue. Each month-end moves $1,800 from deferred revenue to subscription revenue, and the onboarding share moves when training is delivered. The full walk-through is in deferred revenue for SaaS.
Your annual recurring revenue and recognized revenue will differ. Recognized revenue follows this standard, and annual recurring revenue is an operating metric. Investor updates should label which one they show (investor update template).
Questions founders ask
Do startups have to follow ASC 606?
If you issue financial statements under US GAAP, for investors, lenders or an audit, yes. Startups that keep cash-basis books for taxes do not apply it day to day, but most investors expect accrual books for a subscription company.
How is SaaS revenue recognized under ASC 606?
Usually evenly over the subscription period. PwC's guide says a promise to provide access to a SaaS platform typically qualifies as a series of distinct services recognized with a time-based measure.
What are the five steps of ASC 606?
Identify the contract with the customer, identify the performance obligations, determine the transaction price, allocate the price to the obligations, and recognize revenue when or as each obligation is satisfied.
Is implementation revenue recognized at once?
Only if the implementation is a distinct obligation and you deliver it. If it is not distinct, it combines with the subscription and is recognized over the subscription term.
Should I capitalize sales commissions?
You capitalize commissions you expect to recover, and you may expense them when incurred if the amortization period is one year or less.
Revenue schedules handle the monthly recognition
Accountable creates a revenue schedule from an annual payment and posts each month's share at month-end. You set the total, the first month, the months and the revenue account, and your CPA can review every entry.
Start freeSources, checked September 30, 2026: