Is anyone adopting ASC 606?
June 6, 2019
The adoption of new accounting rules is not a topic we normally bring up in conversations with SaaS companies, but the ASC 606 change has created enough confusion (and work) that we have found ourselves talking about it more than we’d like. We actually like the existing accounting rules and think the new rules do not present the underlying performance of a SaaS business as well as current rules. That said, what we think about the new rules does not matter, and FASB requires these new rules to be implemented for the year ended 2019 for private companies wishing to be GAAP compliant.
Given that reality, we wondered how much work most private SaaS companies are doing to become compliant with ASC 606?
The answer, as of mid-2019, appears to be: “not much.”
- Data point number one: out of the hundreds of SaaS companies we have chatted with this year, only one company has used 606 accounting rules. Their revenues and costs were presented as before, and they then added a few new line items called “606 impact” that reconciled the traditionally reported numbers to the new rules.
- The second data point is from our friends at SaaSOptics who have recently launched a 606 revenue recognition module and have seen “modest” uptake so far.
When we chatted with our CFOs about what’s going on, we heard: “It’s not something I’m going to deal with during the year. I will have our auditors suggest some year-end adjustments which will show up on our audit, but not anywhere else.”
This approach made good sense to us. Under our perspective that 606 rules obfuscate underlying business performance, there is no use reporting them monthly to the board, investors, or management team members. A simple annual journal entry or two in the audit would suffice. Most CFOs have about 20 other things that are more important than 606 compliance.
That said, and after chatting with a few accountants, here is the reality of that approach:
- Doing a few journal entries at year-end to adjust for the new rules will only last one or two years before your “operating numbers” diverge too far from your audited numbers. You can’t keep it up forever.
- ASC 606 is the standard whether we like it or not and it is what public SaaS companies are reporting. Non-compliant internal numbers will, over time, become suspect to outside investors, lenders, or buyers. Your books are either GAAP-compliant or they are not.
- Waiting until the end of the year to let your auditors sort through it all will be a lot of work for them, and expensive to you. And remember, to get your 2019 numbers right, there will be a re-set of the 2018 deferred revenue number, and that will take some work.
ASC 606 implementation is one of those important but not urgent things that tends to get pushed off until it finally becomes urgent.
But the good news for the day is, most of your peers have pushed it off too.
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