In today’s world, cloud-based software is increasingly important to businesses large and small that want to grow and outpace their competitors. To accomplish this, these companies must meet performance obligations and ensure revenues keep pace with projections. Here’s all you need to know to understand better how cloud accounting software’s strategic role fits with ASC 606.
Should your company sell cloud-based software to consumers, you must have a clear understanding of what is ASC 606 is and how it can impact not only your implementation services but also your relationships with customers.
If your company leases smart devices to customers rather than just sells the devices to them outright, ASC 606 will allow you to realize accounting outcomes that can have a much more positive impact on your company’s revenues. Combining multiple performance obligations into one arrangement allows you to use ASC 606 to your advantage and apply a revenue standard to your business that will optimize profits and performance.
As your company comes to a greater understanding of how ASC 606 is positioned strategically regarding cloud accounting software, you must pay close attention to the general model that allows for exceptions with variable considerations in terms of sales or usage-based royalties. Since SaaS arrangements typically do not qualify for exceptions since licenses usually do not transfer to customers in these instances, you will need to estimate certain variable considerations so that customers can pay a variable amount based on their usage of SaaS technology.
Hybrid Arrangements and Solutions
As more and more companies come to depend on cloud accounting software and thus must meet ASC 606 guidelines and expectations, you may decide that the best path forward for your company in this area is to implement a series of hybrid arrangements that will offer numerous solutions for you and your customers.
By doing so, you will allow your customers to use the software as on-premises or cloud-based, as well as combine the two into a hybrid arrangement. However, keep in mind that with on-premises software, a third-party will act as a host under a contract separate from any other arrangement, meaning your company may give up a certain level of control regarding transactions and how ASC 606 impacts different areas of operation.
Blend and Extend Modifications
If you have concerns about hybrid arrangements and wonder if these may make applying ASC 606 to current revenue recognition standards more difficult, you may blend and extend modifications for such situations instead.
By using blend and extend modifications, you can modify certain arrangements before the initial contract expires. Thus, you can either renew the existing contract if you and your customer are satisfied with the current arrangement or instead revise pricing and other terms included in the contract. If you do the latter, your accounting software will then be able to document the modifications since these will be in a separate contract for ASC 606 additional services.
One of the biggest benefits of cloud accounting software’s strategic role in ASC 606 involves licensing arrangements. Since some customers may initially be sceptical of cloud-based services, they may elect to start out with on-premises services before realizing the many benefits cloud-based software offers.
By applying the ASC 606 revenue standards to your software licensing arrangements, you can work with a much more diverse set of clients and thus increase your company’s growth and profits. As you can give customers more options regarding their usage, forfeiture of on-premises rights will become easier for customers to implement and for your company to manage, creating a win-win situation for everyone.
Knowing as much as possible about ASC 606 will help your company grow faster than you ever anticipated. Playing a more important strategic role than ever before, ASC 606 will help you meet revenue recognition standards and show your customers why cloud-based software is the wave of the future.
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