Oops! Something went wrong while submitting the form.
Sign in
Get a Demo
See your data in HubiFi < 2 days
Get a clear ASC 606 memo example with step-by-step guidance to document revenue recognition decisions and simplify your compliance process.
Creating an ASC 606 memo often feels like a scavenger hunt for data. You need contract details from your CRM, billing information from your payment processor, and usage data from your product team. Manually pulling all this information together is not only time-consuming but also prone to error. The memo is only as good as the data that supports it. A flawed dataset leads to a flawed analysis, putting you at risk during an audit. This article will not only show you what a great asc 606 memo example looks like but also discuss how to build a process that ensures your data is accurate and accessible. We’ll cover best practices for documentation and explore how connecting your systems can make compliance a much smoother process.
If you’ve heard the term "ASC 606" floating around, you might think it’s just another piece of complicated accounting jargon. But at its core, the concept is pretty straightforward. Think of ASC 606 as the universal rulebook for how businesses report the money they earn from customers. Before this standard came along, different industries had different ways of recognizing revenue, which made it tricky to compare one company’s financial health to another’s.
The Financial Accounting Standards Board (FASB) introduced ASC 606 to create a single, comprehensive framework that applies to everyone. This shift requires businesses to take a closer look at their customer contracts and be more deliberate about when they can actually count their earnings. It’s not just about when cash changes hands; it’s about when you’ve truly earned it by fulfilling your promises to the customer. Getting this right is essential for accurate financial reporting, passing audits, and making smart business decisions based on a clear picture of your performance.
At its heart, ASC 606 is a set of accounting rules that tells businesses how to report the money they earn, also known as revenue. It was created to make sure companies across all industries report their income in a fair and consistent way. Instead of having separate guidelines for software, telecommunications, and construction, for example, everyone now follows the same five-step model. This consistency is a game-changer. It means that whether you’re a SaaS company or a retailer, the principles for recognizing revenue are the same. This unified approach simplifies the process and removes the guesswork, ensuring your revenue recognition memo is built on a solid, standardized foundation.
So, why does having a single standard matter so much? The main goal of ASC 606 is to make financial statements more transparent and comparable across the board. When every company follows the same rules, it’s much easier for investors, lenders, and even internal leadership to understand what’s really going on. It makes financial reports clearer, so anyone can see exactly how and when a company earns its money. This transparency helps stakeholders compare different companies more easily and make more informed decisions. Ultimately, it builds trust and provides a more accurate view of a company’s financial position, which is a win for everyone involved.
At its core, ASC 606 provides a single, comprehensive framework for recognizing revenue from customer contracts. The goal is to make financial statements more consistent and comparable across different companies and industries. Instead of following a patchwork of industry-specific rules, everyone now uses the same five-step process. This model ensures that you recognize revenue when you've actually earned it—that is, when you've transferred the promised goods or services to your customer.
While the concept is straightforward, applying it can get tricky, especially for businesses with complex contracts, subscriptions, or multiple deliverables. Breaking the process down into these five distinct steps makes it much more manageable. Think of it as a roadmap that guides you from the initial customer agreement to the final entry in your revenue ledger. Following this structure helps you stay compliant, avoid costly errors, and provide a clearer picture of your company’s financial performance. For a deeper dive into specific accounting topics, you can always find more insights in the HubiFi blog.
First things first: you need to confirm you have a legitimate contract with a customer. This doesn't always mean a formal, signed document. A contract can be written, oral, or even implied by your standard business practices. For it to be valid under ASC 606, it must meet a few key criteria. Both you and your customer must approve the agreement and be committed to fulfilling your obligations. The contract must clearly identify each party's rights and the payment terms. Most importantly, the deal must have commercial substance, and you must determine that it's probable you'll collect the payment you're entitled to.
Once you have a contract, the next step is to identify your "performance obligations." This is just a formal way of saying you need to pinpoint every distinct promise you've made to deliver a good or service to your customer. A promise is considered "distinct" if the customer can benefit from it on its own or with other readily available resources. It also needs to be separately identifiable from other promises in the contract. For example, if you sell a software license along with a separate installation service, you likely have two distinct performance obligations because the customer could use the software without your specific installation service.
Now it's time to figure out the transaction price—the total amount of compensation you expect to receive in exchange for fulfilling your promises. For simple sales, this is easy; it's just the price of the product. But it gets more complex when you have variable consideration, like discounts, rebates, refunds, or performance bonuses. You'll need to estimate the most likely amount you'll receive. This step also requires you to consider any significant financing components and account for noncash consideration. It’s all about determining the true economic value of the contract before you start allocating it.
If your contract has multiple performance obligations, you can't just recognize the full contract price at once. You need to allocate the total transaction price to each distinct promise you identified back in Step 2. The allocation should be based on the standalone selling price of each good or service—that is, what you would charge for each item separately. If you don't have a standalone selling price, you'll have to estimate it using an appropriate method, like the adjusted market assessment or expected cost-plus-a-margin approach. This ensures each part of the deal is valued correctly.
This is the final and most crucial step: recognizing the revenue. You can recognize revenue only when (or as) you satisfy a performance obligation by transferring control of the promised good or service to the customer. This transfer can happen at a single "point in time," like when a customer buys a product from your store. Or, it can happen "over time," as with a year-long subscription service. The key is that revenue recognition is tied directly to the transfer of value to the customer. Automating this process with the right integrations with HubiFi can ensure accuracy and timeliness as your business grows.
Think of an ASC 606 memo as the official record of your revenue recognition decisions for a specific contract. It’s the story of how you applied the five-step model, explaining your reasoning and showing your work. This document is crucial for your internal team, stakeholders, and especially for auditors who need to understand your accounting logic. A well-written memo demonstrates diligence and creates a clear, defensible trail for every dollar of revenue you recognize.
The goal isn't to write a novel, but to be clear, concise, and comprehensive. Each memo should be a self-contained guide to a contract's revenue journey, from the initial agreement to the final entry in your ledger. By breaking it down into key components, you can ensure you cover all your bases and create a document that stands up to scrutiny. For more deep dives into financial operations, you can find additional insights on our blog.
Before you get into the complex calculations, you need to set the stage. This section of your memo provides a high-level summary of the agreement with your customer. It should include a description of the contract, its start and end dates, and any key terms and conditions that will influence how you recognize revenue. Think of it as the executive summary for the contract itself. You’re not just attaching the signed document; you’re pulling out the essential details that an auditor or new team member would need to grasp the context quickly without reading every line of legalese.
Here’s where you start connecting the contract to the five-step model. In this part, you’ll detail your analysis of the promises made to the customer. The key is to determine if these promises are distinct performance obligations—like selling a software license, providing installation services, or offering ongoing technical support. You need to list each obligation and explain your reasoning for identifying it as separate. You’ll also state whether you plan to recognize the revenue for each one at a single point in time (like upon delivery) or over time (like a monthly subscription).
This section is all about the money. You need to clearly lay out the total transaction price and how you calculated it. It’s not always as simple as looking at the price tag. You must account for any variable consideration, which includes things like performance bonuses, discounts, potential refunds, or usage-based fees. If you have to estimate any of these amounts, you need to explain the method you used to arrive at that estimate. This transparency is critical for showing that you’ve considered all factors that could affect the total value of the contract.
Now that you’ve identified the obligations and the price, it’s time to specify when you’ll recognize the revenue for each part. This section outlines the method you'll use for every performance obligation over the contract's life. For obligations satisfied over time, you might use a method like the straight-line basis (equal amounts each period) or an input/output method (based on progress). For those satisfied at a point in time, you’ll define the specific trigger for recognition, such as when the customer gains control of the asset. This ensures your revenue is recorded in the correct period.
Finally, your memo needs to include the evidence. This is where you attach all the supporting documents that back up your analysis. The most important document is, of course, the signed contract itself. But you should also include any other relevant paperwork, like purchase orders, statements of work, or correspondence that clarifies the contract terms. Using clear headings for each of the five steps and referencing these documents throughout your memo makes your entire process auditable and easy to follow. Automating this process with the right tools can ensure all your data sources are connected and documentation is seamless, which is something you can explore when you schedule a demo with our team.
Think of your ASC 606 memo as the story of a contract. It needs a clear beginning, a detailed middle, and a logical conclusion that anyone—from your CEO to an external auditor—can follow. A solid structure not only makes your memo easier to write but also ensures you don’t miss any critical details. A well-written revenue recognition memo is more than just a compliance checkbox; it's a valuable internal record, a training tool, and a way to ensure consistent financial reporting as your company grows. Let’s walk through the four key sections that will make your memo clear, comprehensive, and audit-proof.
Your executive summary is the first thing anyone will read, so make it count. This section should provide a high-level overview of the entire memo in just a few paragraphs. Think of it as the SparkNotes version. Briefly describe the contract, the key conclusions you reached (like the number of performance obligations and the total transaction price), and the overall impact on revenue recognition. The goal is to give a busy executive or auditor the essential information they need without having to read every single line of your analysis. It sets the stage and provides context for the detailed breakdown that follows.
This is where you get into the details. For every contract, you need to break down your promises to the customer into distinct performance obligations. Your memo should include a thorough analysis of these promises, explaining how you determined if they are separate deliverables, like manufacturing, installation, or ongoing support. For each obligation, you’ll need to state whether revenue will be recognized over time or at a specific point in time, like upon delivery. This section is the heart of your memo, as it directly applies the five-step model to the specific terms of your contract and justifies your accounting treatment.
Your memo for a single contract doesn't exist in a vacuum—it needs to align with your company's overall accounting policies. This section is where you connect the dots. Explicitly state how your analysis of this specific contract adheres to your established, company-wide revenue recognition policies. ASC 606 requires companies to disclose detailed information about their revenue streams, so referencing your internal policies demonstrates consistency and a systematic approach to compliance. This is crucial for passing audits and ensuring that your financial reporting is uniform across all your customer agreements. Having integrated systems can make applying these policies consistently much easier.
Clarity on timing is essential, especially if your memo documents the initial adoption of ASC 606 or a complex, long-term contract. This section should clearly state the date you plan to apply the standard and the transition method you're using (full or modified retrospective). For example, you might state that you will apply ASC 606 retrospectively starting January 1st of the fiscal year, restating prior periods for comparability. This provides a clear roadmap for anyone reviewing your financials, showing exactly when and how the revenue recognition changes take effect. It removes ambiguity and provides a transparent record of your implementation plan.
Theory is great, but seeing how it all works in practice is even better. Let's walk through how to apply the five-step model to a real-world scenario and structure your findings in a clear, compliant memo. Think of this as your roadmap for turning complex contract details into a straightforward story that auditors and stakeholders can easily follow. We'll cover the essential components of the memo, look at a common business case, and even break down the journal entries.
Your ASC 606 memo doesn't need to be overly complicated, but it does need to be thorough. It should clearly document your analysis and conclusions for each of the five steps. Start with the basics: contract date, customer name, and a brief description of the agreement. From there, your memo must detail each distinct performance obligation you've identified in the contract and explain your reasoning. You’ll also need to show how you determined the total transaction price, including any variable considerations. Finally, outline how that price is allocated across the different obligations and the specific timing for when you’ll recognize the revenue for each.
Let's imagine you run a SaaS company. You just signed a one-year contract for $12,000 that includes access to your software platform and premium customer support. Under ASC 606, the software license and the support services are likely two separate performance obligations because the customer can benefit from each one on its own. Recognizing revenue for these services can get tricky, as they are delivered over different timelines. The software is delivered over the full year, but the support is used as needed. This is where a tight link between your usage data and accounting system becomes critical. Having seamless integrations with HubiFi ensures your financial records always reflect the actual delivery of services.
When you analyze any contract, always come back to the five-step model. It’s the foundation of your entire memo and ensures you don’t miss anything. Here’s a quick refresher on the framework:
Following this process methodically for every contract will create consistency in your accounting and make your memos much easier to write and defend.
Let’s continue with our $12,000 SaaS contract. Suppose you determine the software license has a standalone value of $10,800 and the support is valued at $1,200. When the customer pays upfront, you would initially record the full $12,000 as deferred revenue. Each month, you would recognize 1/12th of the revenue for each obligation. That means you’d move $900 for the software ($10,800 / 12) and $100 for the support ($1,200 / 12) from deferred revenue to recognized revenue. Manually tracking these entries for hundreds or thousands of contracts is a huge task. You can schedule a demo to see how automation can handle these complex calculations and journal entries for you, saving time and reducing errors.
Writing an ASC 606 memo can feel like a final exam. You know the material—the five-step model seems clear enough—but applying it to real-world contracts is where things get complicated. Even seasoned finance professionals can find themselves wrestling with the nuances of the standard. The memo is your opportunity to document your thought process, justify your conclusions, and create a clear record for auditors and stakeholders.
The most common hurdles usually appear when you move from theory to practice. How do you break down a complex contract into its individual promises? What do you do when the final price depends on future events? These aren't just academic questions; the answers directly impact your company's financial statements. Getting them wrong can lead to restatements, audit issues, and a loss of investor confidence. We'll walk through the four biggest challenges you're likely to face and how to think through them. For more deep dives into financial topics, you can find additional insights in the HubiFi blog.
At its core, a performance obligation is a promise you make to a customer. The challenge is figuring out which promises are distinct and which are part of a larger bundle. For example, is a software setup fee a separate service, or is it just part of granting access to the software? Under ASC 606, you need to treat them as separate promises, or what the standard calls "distinct performance obligations." Instead of lumping the setup fee into the first month's revenue, you must allocate a portion of the total contract price to that setup service. This gets even more complex with usage-based models, where you need a tight link between usage data and your accounting system to recognize revenue correctly.
Not every contract has a fixed price. Variable consideration includes things like discounts, rebates, performance bonuses, or usage-based fees that can change the total transaction price. The difficulty here is that you have to estimate this amount when the contract begins, even if the final figure won't be known for months or even years. For example, the total transaction price might be $100,000, including any variable consideration, such as usage-based fees or estimates of future refunds. This requires you to use historical data, market trends, and a bit of forecasting to arrive at a reasonable estimate, which must be documented and justified in your memo.
Once you’ve identified your performance obligations and determined the transaction price, you have to allocate that price to each distinct obligation. This allocation should be based on the standalone selling price of each item—what you would charge for that good or service separately. This is straightforward when you have a clear price list, but it gets tricky when you don't regularly sell items individually. In those cases, you'll need to use estimation methods to determine the standalone price, a process that requires solid judgment and clear documentation. Having seamless integrations with HubiFi can help pull the necessary data from your CRM and billing systems to make this allocation more accurate.
The final hurdle is timing. ASC 606 states that revenue should be recognized when the customer actually gains control of the goods or services, not just when they are billed or when a contract is signed. Control can be transferred at a single point in time (like when a customer downloads a piece of software) or over a period of time (like a year-long support contract). Determining that exact moment of transfer requires careful analysis of the contract terms. For services recognized over time, you need a reliable method to measure progress, ensuring revenue is recorded smoothly and accurately throughout the contract period.
Writing an ASC 606 memo is one thing, but getting the data right to support it is another challenge entirely. If your team is still wrestling with spreadsheets and manually pulling data from different departments, you know how quickly things can get messy. This is where automation changes the game. Instead of spending weeks piecing together information and double-checking calculations, you can let technology handle the heavy lifting. This frees up your finance team to focus on strategic analysis rather than tedious data entry.
Automated revenue recognition software isn't just about speed; it's about accuracy and consistency. It creates a reliable system that applies the five-step model to every contract, every time, without human error. This means your financial reporting is more dependable, your books close faster, and you're always prepared for an audit. Think of it as building a solid foundation for your revenue operations. By automating the process, you create a single source of truth that gives you a clear view of your company's financial health and ensures you stay compliant as your business grows. It’s a smarter way to manage one of the most critical aspects of your finances.
Consistency is key to compliance. Automation helps you establish standardized workflows for handling every contract, so you’re not starting from scratch each time. A well-written revenue recognition memo is more than just a compliance document; it’s a valuable internal record and a training tool that ensures consistent financial reporting as your company grows. With automation, you can build these best practices directly into your process. The system guides your team through the five-step model, ensuring all performance obligations are identified and the transaction price is allocated correctly every single time. This removes the guesswork and reduces the risk of inconsistent application of the rules across different contracts or team members.
One of the biggest headaches with ASC 606 is that the necessary information is often scattered across different systems—your CRM, billing platform, and accounting software. Manually piecing this data together is not only time-consuming but also a recipe for errors. Automation solves this by connecting all your systems to create one central, accurate source of information. An automated platform can pull contract details from Salesforce, payment information from Stripe, and sync journal entries with QuickBooks or NetSuite. This seamless flow of data ensures that your revenue recognition is based on a complete and up-to-date picture of your customer agreements, eliminating data silos and manual reconciliation for good.
With manual methods like spreadsheets, you often don't spot a compliance issue until you're deep into the quarter-end close or, even worse, during an audit. Automation shifts you from a reactive to a proactive approach. Because the system is continuously processing data as it comes in, you can monitor your revenue recognition status in real-time. Dashboards and reports give you instant visibility into deferred revenue, recognized revenue, and any potential compliance red flags. This allows you to address issues as they arise, not weeks or months later. Using automation helps you follow ASC 606 rules correctly, save time, and prevent costly errors, ensuring you’re always compliant.
When auditors come knocking, they want to see your work. A clear, documented audit trail is non-negotiable. Automation makes this incredibly simple. Every calculation, journal entry, and adjustment made by the system is automatically logged, creating a detailed and easily traceable record. A revenue recognition memo explains how you followed the 5-step model, and it’s crucial for showing auditors you're following the rules. With an automated system, you can instantly pull reports that back up every number in your memo, demonstrating exactly how revenue was recognized for any given contract. This level of transparency not only makes audits smoother but also builds confidence in your financial reporting.
Writing an ASC 606 memo can feel like a complex puzzle, but with the right approach, you can make the process smooth and repeatable. Beyond just following the five-step model, adopting a few key practices will help your team produce clear, consistent, and audit-proof documentation every time. Think of these as the habits that separate the good memos from the great ones.
Implementing these best practices helps you build a strong foundation for compliance. It ensures that anyone—from an internal stakeholder to an external auditor—can understand the logic behind your revenue recognition decisions. This not only saves you time and headaches down the road but also strengthens the integrity of your financial reporting. By creating a systematic approach, you turn a challenging requirement into a manageable, routine part of your accounting cycle. For more expert advice on financial operations, you can find plenty of insights on the HubiFi blog.
Consistency is your best friend when it comes to ASC 606 memos. Establishing clear documentation standards from the outset ensures that every memo your team produces is thorough and uniform. ASC 606 requires companies to disclose detailed information about their revenue streams, which means you must clearly identify the distinct performance obligations in the contract and determine the total transaction price.
To achieve this, create a standardized template that outlines every required section of the memo. Define key terms and specify exactly what supporting documents—like the signed contract or statement of work—must be attached. This removes guesswork and ensures nothing falls through the cracks, making the process more efficient and your final documentation much stronger. HubiFi’s solutions are designed to help you standardize these workflows, as you can see in our pricing information.
Revenue recognition is a team sport. It’s rarely a task that the finance department can handle in a vacuum. To get the full picture, your finance, sales, and legal teams should work together to understand how contracts affect revenue recognition. Your sales team knows the promises made to the customer, your legal team understands the contractual terms and conditions, and your finance team brings it all together under the ASC 606 framework.
Fostering this collaboration prevents critical details from being overlooked. Set up a process for these teams to communicate on complex or non-standard deals. This could be a quick meeting or a shared channel where questions can be answered promptly. When everyone is aligned, your memos will more accurately reflect the substance of your customer agreements. Seamless integrations with HubiFi can connect your CRM and ERP to facilitate this data sharing.
Even the most detail-oriented person can make a mistake. That’s why a formal review process is non-negotiable for producing a flawless ASC 606 memo. Have another qualified person check your revenue recognition memos to catch mistakes and ensure consistency. This second set of eyes can spot errors in calculations, misinterpretations of contract terms, or inconsistencies with company policy that the original author might have missed.
This isn’t about micromanagement; it’s a crucial quality control step that reinforces accuracy and builds confidence in your financial statements. A peer or manager review also serves as a valuable training opportunity for your team. By building this step into your workflow, you create a system of checks and balances that will hold up under the scrutiny of an audit. To see how automation can streamline your review process, schedule a demo with HubiFi today.
Do I need to write a detailed memo for every single contract? That's a great question, and the practical answer is no, not always. While the principles of ASC 606 apply to every contract, the standard allows for a portfolio approach. If you have a large volume of contracts with similar characteristics and terms, you can group them together and create a single memo that covers the entire portfolio. The key is that you must reasonably expect that the accounting outcome for the portfolio wouldn't be materially different from applying the rules to each individual contract. This is a huge time-saver for businesses with standardized offerings.
What's the most common mistake companies make when applying the five-step model? Many businesses stumble on Step 2, identifying the performance obligations. It’s easy to look at a contract and see it as one big promise, but ASC 606 requires you to unbundle it into every distinct good or service you've committed to delivering. Forgetting to separate something like an installation fee or a training session from a software license is a frequent error. This mistake has a domino effect, as it throws off your price allocation in Step 4 and the timing of your revenue recognition in Step 5, leading to inaccurate financial statements.
Is ASC 606 something only large, public companies need to worry about? Not at all. While the transition was certainly a major event for public companies, the standard applies to nearly all private companies that prepare financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). The goal of ASC 606 was to create a single, universal standard for everyone. So, if your business needs to pass an audit, secure a loan, or provide financials to investors, you need to be compliant.
How do I determine a "standalone selling price" if I never sell a service by itself? This is a common challenge. If you always bundle a product or service and don't have a clear standalone price, ASC 606 allows you to estimate it. There are a few accepted methods for this. You could look at what competitors charge for a similar service, or you could calculate your expected cost and add a reasonable profit margin. The most important thing is to choose a logical method, apply it consistently across similar contracts, and document your reasoning clearly in your memo.
Can I just manage this with spreadsheets, or do I really need automation software? You can use spreadsheets, especially if your business is very small and has only a few simple contracts. However, as you grow, spreadsheets quickly become a liability. They are prone to human error, difficult to scale, and don't provide a clear audit trail. Automation software is designed to handle the complexity of ASC 606 by integrating with your other systems, applying the rules consistently, and creating the documentation you need to stay compliant and pass an audit with confidence.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
Meet with an expert in revenue recognition and order-to-cash accounting and automate revenue close.
*Or watch 2 minute demo here.
Power your high-volume business's revenue compliance and reporting needs with one platform.
