Why ASC 606 Matters to Professional Services Organizations

Does your professional services organization know exactly where it’s making its money? This is where revenue recognition comes into play, helping businesses define specifically where revenue is earned during the accrual accounting process.

However, navigating the intricacies of revenue recognition can be a daunting task for professional services organizations. This is where ASC 606, the comprehensive accounting standard for revenue recognition, comes into play. But it’s not just a matter of meeting a standard, compliance with ASC 606 plays a critical role in ensuring accurate and consistent revenue reporting.

By understanding why ASC 606 matters, the steps required in its revenue recognition model, and how it applies to professional services businesses, your organization can thrive.

Understanding the ASC 606 Model

ASC 606 was established in 2014 to standardize how companies recognize revenue from contracts with customers. The five-step model it introduced provides a clear framework for revenue reporting and is structured like this:

1. Identifying the Contract – Determine whether it should be accounted for using the ASC 606 model.
2. Identifying Performance Obligations – Identify the performance obligation in a contract with the customer, which include contracted actions or deliverables.
3. Determining the Transaction Price – Define the amount an entity expects to be entitled in exchange for transferring the promised goods and services under the contract.
4. Allocating the Transaction Price – Apply transaction price to each of the distinct performance obligations in the contract.
5. Recognizing Revenue – Officially recognize revenue when a promised good or service is transferred to a customer, giving them control of the asset.

Its counterpart in the EU, IFRS 15, mirrors these steps, ensuring global consistency in revenue recognition in professional services businesses. For organizations operating globally, understanding and complying with IFRS 15 is equally important.

Relevance to Professional Services Organizations

For professional services organizations, accurate revenue recognition is paramount. Whether dealing with time and materials contracts, fixed price agreements, retainers, or subscription models, ASC 606 provides a structured approach to recognizing revenue. Strong, purpose-built professional services management software solutions are designed to support this process, enabling firms to manage multiple deal types seamlessly and comply with these stringent standards.

Kantata: Enabling Compliance and Maturity

Kantata plays a pivotal role in helping organizations achieve compliance with ASC 606. Our platform aggregates data accurately, enabling firms to track and report revenue with precision. By automating calculations and streamlining period-end close processes, Kantata gives organizations a holistic view of their revenue, both recognized and deferred, which is integrated into our platform’s functionality..

At Kantata, we understand that compliance with ASC 606 is more than just a regulatory requirement—it’s a pathway to financial clarity and organizational maturity. By leveraging our platform, professional services organizations can navigate the complexities of revenue recognition with confidence, ensuring they remain compliant and competitive in today’s market. Embrace the power of accurate revenue recognition with Kantata, and let us help you win in the margins.