Revenue recognition under ASC 606: the founder's view

ASC 606 is the revenue recognition standard that applies to almost every US-reporting company. Founders run into it during their first audit or first US-GAAP-style investor reporting cycle. The standard itself is dense; the operating implications are not.

The five-step model, in operating terms

1. 1Identify the contract with a customer.
2. 2Identify the performance obligations in the contract.
3. 3Determine the transaction price.
4. 4Allocate the transaction price to the performance obligations.
5. 5Recognize revenue as each performance obligation is satisfied.

In plain language: revenue is recognized when you have delivered what the customer paid for, not when the cash hit your bank.

Where it bites founder-led companies

1. Annual prepaid contracts

A customer pays $120k upfront for a 12-month SaaS subscription. Cash is $120k today; revenue is $10k per month, with the remaining $110k sitting as deferred revenue on the balance sheet. Founders often book the full $120k as revenue in month one — which inflates current revenue and creates a multi-month restatement when the books get audited.

2. Multi-element contracts

A contract that bundles software, professional services, and ongoing support has three performance obligations that recognize on different timelines. Each has to be priced separately for revenue purposes — even if the contract was sold as one bundle.

3. Variable consideration

Usage-based pricing, success fees, performance bonuses — anything where the final price depends on outcomes — has to be estimated and recognized over the contract period, not at the moment cash arrives.

What to do early

Build the contract intake habit early: for every signed contract, document the performance obligations, the price allocation, and the recognition timeline before the cash arrives. By the time the audit happens, the documentation is in place and the books reflect economic reality, not cash timing.