Revenue Recognition Policy 101
What’s a Revenue Recognition Policy?
A revenue recognition policy is a single document which summarizes your processes and methodologies used to recognize revenue.
Why do I need one?
Your revenue recognition policy is where you establish the rules that govern the consistent application of the ASC 606 framework at your company.
The ASC 606 framework is a set of requirements each company must satisfy before they can recognize revenue. These requirements are set forth by the Financial Accounting Standards Board (“FASB” for short).
Why should I care?
In short, you should care about having a solid revenue recognition policy because your auditors care. According to a study conducted by The CPA Journal, revenue recognition issues were the leading cause of financial statement fraud in 11 out of 15 years from 2000 to 2014.
Because revenue recognition issues are the leading cause of financial misstatements, auditors require lots of documentation to ensure accuracy. Having a solid revenue recognition policy in place saves you from the wild goose chase of producing contract after contract to account for specific line items in your financial statements.
So, why doesn’t everyone have a revenue recognition policy?
Turns out, they’re not super easy to put together. Companies pay thousands of dollars to have revenue recognition policies written for them, but here at SaaSOptics, we’ve done the heavy lifting for you.
In our downloadable revenue recognition policy, we lay out a totally customizable revenue recognition policy for you to adapt for your business.
Because there are 5 main principles of ASC 606, our revenue recognition policy contains 5 sections in which there are three subsections. The first lays out guidance for writing that portion of the revenue recognition policy. The second is a set of considerations that apply to our hypothetical SaaS business, and the third is an actual sample revenue policy for you to adapt as needed for your own revenue recognition policy.
The following is a preview of our revenue recognition policy’s table of contents:
Revenue Recognition Policy Table of Contents:
Scope and Purpose 6
Policy Summary 7
Revenue Analysis 9
Step 1: Identify the Contract 9
Step 2: Identify the Performance Obligations 13
Explicit vs. implicit promises 15
Single vs. combined performance obligations 16
Specified upgrades and product roadmaps 16
Step 3: Determine the Transaction Price 18
Step 4: Allocate the Transaction Price 24
Step 5: Recognize Revenue 28
Appendix A – Resources (delete before finalizing) 32