ASC 606 (Revenue from Contracts with Customers)

ASC 606 replaced industry-specific revenue rules with a single five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price across obligations, and recognize revenue as each obligation is satisfied.

It matters most to subscription, retainer, and milestone-billed businesses: agencies, SaaS, professional services, and any business that collects cash before delivering. Setup fees, annual prepayments, and bundled service packages all require ratable recognition.

Under ASC 606, cash collected ahead of delivery sits on the balance sheet as deferred revenue and amortizes into revenue as the service is performed. The reverse case is unbilled receivables — work you've delivered but haven't invoiced yet — which sits as an asset until billing catches up.

The trickiest step is #2 (identifying performance obligations). A SaaS subscription with implementation services can be one obligation (if the implementation isn't distinct) or two (if a competent third party could do the implementation without the SaaS itself). Getting this wrong changes how much revenue you recognize upfront and how much over the contract term — the difference is often material enough to affect gross margin and how the business gets valued.

For M&A and investor diligence, ASC 606 compliance is table stakes. Buyers look at the deferred-revenue balance to price the transaction (they inherit the obligation), and any revenue recognized outside 606 gets stripped out of adjusted EBITDA. Cash-basis books that ignored 606 during growth are the single most common QoE-adjustment source in small-business acquisitions — worth converting BEFORE going to market, not during diligence.