Oops! Something went wrong while submitting the form.
Get a Demo
See your data in HubiFi < 2 days
Get clear, actionable advice on ASC 606 practical expedients. Learn how these shortcuts simplify revenue recognition and support accurate financial reporting.
For any high-volume business, applying the five-step revenue recognition model to every single contract is not just impractical—it's a recipe for errors and delays. The complexity of tracking individual contract costs, financing components, and modifications can quickly overwhelm even the most diligent finance team. This is precisely the challenge that ASC 606 practical expedients were designed to solve. They are specific, optional accounting methods that allow you to simplify the application of the standard in certain situations, like grouping similar contracts into a portfolio. This guide will walk you through how to strategically choose and implement these expedients to build a more efficient, scalable, and audit-proof revenue recognition process.
Getting your revenue recognition right is crucial, but let's be honest—the rules can feel overwhelming. The good news is that the ASC 606 standard includes some built-in relief options called practical expedients. Think of them as approved shortcuts that help you comply with the rules without getting bogged down in unnecessary complexity. They’re designed to make your accounting process more efficient, saving you time and resources while still keeping your financials accurate and compliant. Using them correctly can be a game-changer, especially for businesses with a high volume of transactions.
So, what exactly are practical expedients? They are specific, optional accounting methods you can use to simplify the application of the revenue recognition standard. Instead of following a complex rule to the letter, you can apply a simpler approach in certain situations. This matters because it acknowledges that a one-size-fits-all approach doesn’t work for every business or every contract. These expedients give you the flexibility to apply the principles of ASC 606 in a way that makes sense for your operations, without sacrificing the quality of your financial reporting. They are your ticket to a more streamlined and manageable compliance process.
The biggest win you’ll get from using practical expedients is efficiency. They directly reduce the cost, effort, and complexity tied to revenue recognition. Instead of spending hours on intricate calculations for every single contract, you can apply a simplified method that gets you to the same compliant result much faster. This frees up your finance team to focus on more strategic work, like analysis and planning. For high-volume businesses, this isn't just a small perk—it's a critical operational advantage. Automating these processes with the right integrations can further amplify these benefits, ensuring accuracy and speed as you grow.
While there are several practical expedients available, a few common ones apply to most businesses. Understanding which options are available is the first step toward simplifying your accounting.
Here are a few key examples:
Choosing which practical expedients to use is a strategic decision that goes beyond simple accounting. It’s about finding the right balance between simplifying your processes and maintaining the detailed financial insights your business needs to grow. Not every expedient will be a good fit, and some might offer more benefits than others depending on your contract structures. Before you commit, it’s essential to weigh the pros and cons, understand the financial implications, and commit to a consistent approach. This thoughtful process ensures you’re not just compliant, but also making smart choices that support your long-term financial health.
At their core, practical expedients are accounting shortcuts permitted under ASC 606. Their main purpose is to make complicated revenue recognition tasks simpler and faster, saving your team valuable time and resources. When you’re evaluating your options, look for expedients that directly address your biggest compliance headaches. For example, if tracking the costs to obtain a contract is a manual, time-consuming process, the expedient that allows you to expense those costs as incurred might be a perfect fit. The goal is to find shortcuts that genuinely reduce your workload without compromising the accuracy of your financial reporting. You can find more insights in the HubiFi Blog to build your foundational knowledge.
Practical expedients are designed to help, but they aren't a universal solution for every business. They tend to be most useful for companies with complex accounting processes, where the effort saved is significant. Before adopting an expedient, you need to do a quick cost-benefit analysis. Does the time and effort you'll save outweigh any potential loss of granular data? You must also evaluate the specific conditions for each expedient to make sure you’re using it correctly and that it truly simplifies your accounting. Sometimes, the work required to qualify for an expedient can be just as complex as the original accounting method, so choose wisely.
Adopting a practical expedient isn't a behind-the-scenes decision—it has a real impact on your financial statements and requires full transparency. If you use any expedients, you must clearly disclose this in your financial reporting. This is because these shortcuts can significantly affect the timing and amount of revenue you recognize. This, in turn, influences key metrics on your income statement and balance sheet, which are closely watched by investors, lenders, and other stakeholders. Being upfront about your methods builds trust and ensures everyone understands the context behind your numbers. You can read more about the disclosure of practical expedients used to prepare.
Consistency is the golden rule of accounting, and it absolutely applies here. Once you choose to use a practical expedient for a particular type of contract, you must apply that same method consistently to all similar contracts. You can't pick and choose on a case-by-case basis to get the most favorable outcome. This consistency demonstrates a reliable and principled accounting policy, which is exactly what auditors look for. It also ensures your financial data is comparable from one period to the next, giving you a clearer picture of your performance over time. Ensuring your systems support this consistency through seamless integrations with HubiFi is key to maintaining compliance.
Alright, you’ve done the research and have a good idea of which practical expedients might work for your business. Now comes the important part: putting them into practice and creating a paper trail. This isn't just about flipping a switch; it's about building a sustainable process that stands up to scrutiny from auditors and gives your stakeholders confidence. A solid implementation plan ensures everyone on your team is on the same page and applies the rules consistently.
This process also makes your life much easier when it's time to close the books or face an audit. Think of it as creating a clear roadmap for your revenue recognition process. By documenting your decisions and setting up controls, you’re not just aiming for compliance—you’re building a more efficient and transparent financial operation. Let's walk through the four key steps to get this done right.
First things first, you need to confirm you actually qualify to use the expedients you’ve chosen. ASC 606 allows for these shortcuts to simplify things, but they aren't a free-for-all. Your eligibility often depends on your specific contracts, business model, and the nature of your performance obligations. For example, the expedient for shipping costs might not apply if shipping is a separate, distinct service you offer. Take the time to assess your eligibility for each expedient and match it against your company’s situation. This initial check prevents headaches down the road and ensures you’re building your new process on a solid, compliant foundation.
Once you’ve confirmed eligibility, it’s time to set up your internal processes. Think of these as the guardrails that keep your revenue recognition on track. Implementing robust internal controls is essential for ensuring you apply your chosen expedients consistently across the board. This could be a simple checklist for your accounting team to follow when reviewing new contracts or an automated workflow within your software. The goal is to remove guesswork and make sure every transaction is treated the same way, improving the accuracy of your financial statements and making them more transparent for investors and other stakeholders.
If an auditor asks why you recognized revenue a certain way, "because it felt right" isn't going to cut it. Proper documentation is your best friend. You are required to disclose and explain which practical expedients you’ve used and your rationale for choosing them. Create a formal policy memo that outlines your decisions. This document should clearly state which expedients your company has elected to use and why they are appropriate for your business. This not only satisfies disclosure requirements but also serves as a valuable training tool for new team members and a reference point for your entire finance department.
Your business isn't static, and your revenue recognition process shouldn't be either. Contracts get modified, new products are launched, and pricing structures change. That’s why you need a regular review process to ensure your chosen expedients are still relevant and being applied correctly. Assessing contract modifications, for instance, requires careful judgment and can impact when revenue is recognized. Schedule a quarterly or semi-annual meeting with your finance team to review a sample of contracts and discuss any new or unusual scenarios. This proactive approach helps you catch inconsistencies early and adapt your processes as your business grows and evolves.
Adopting ASC 606 practical expedients can feel like a major project, and it’s true that there can be some hurdles along the way. Many of the challenges businesses face aren't about understanding the rules themselves, but about applying them to messy, real-world data and processes. Think about it: your revenue data might live in multiple systems, your contracts could have unique terms, and your team might be stretched thin already. It’s easy to feel overwhelmed.
The good news is that these challenges are not unique to your business, and they are entirely solvable. The key is to anticipate them and have a clear plan. Most issues boil down to a few core areas: managing your data, interpreting complex contracts, handling variable pricing, defining your promises to customers, and getting your technology to work together. By breaking down the implementation process and tackling each of these areas head-on, you can create a smooth and efficient path to compliance. This approach not only helps you meet accounting standards but also provides deeper insights into your revenue streams, which is a huge win for strategic planning. Let's walk through some of the most common obstacles and how you can address them effectively.
One of the biggest roadblocks to ASC 606 compliance is data. If your contract information, billing records, and customer data are scattered across different spreadsheets and legacy systems, it’s nearly impossible to get a clear picture. This struggle to manage and interpret data often leads to inaccuracies and delays in recognizing revenue. The first step is to centralize your information. Creating a single source of truth for all contract-related data is essential. This ensures that when you apply a practical expedient, you’re working with complete and accurate information, which is the foundation for reliable financial reporting and a stress-free audit.
ASC 606 requires you to look at your customer contracts with a fresh perspective to identify performance obligations and allocate transaction prices correctly. For businesses with a high volume of sales or customized contracts, this can seem like a monumental task. Instead of getting lost in the weeds of every single agreement, it’s helpful to standardize your approach. By following a structured five-step process for revenue recognition, you can review contracts efficiently and consistently. This framework helps you methodically break down each agreement, ensuring you don’t miss any crucial details while saving your team valuable time and effort.
Variable consideration includes things like discounts, rebates, refunds, and performance bonuses—anything that can make the final transaction price uncertain. Under ASC 606, you have to estimate this amount and include it in the transaction price, but only if it's probable that a significant revenue reversal won't happen later. Making a good estimate depends entirely on having solid historical data. Without easy access to past sales performance, customer behavior, and market trends, you’re essentially guessing. This is where having robust data analytics becomes critical, as it allows you to base your estimates on evidence rather than intuition.
A performance obligation is a promise in a contract to deliver a distinct good or service to a customer. Identifying these obligations correctly is one of the most critical steps in the ASC 606 framework. If you get it wrong, it can fundamentally change your revenue recognition patterns, and it’s often difficult to correct later. For example, is software installation a separate service, or is it part of the software license? Getting this right requires a deep understanding of the promises you’re making to your customers. Take the time to analyze your offerings and document your conclusions clearly to ensure consistency across all your contracts.
Your revenue data rarely lives in just one place. It flows from your CRM to your billing platform to your accounting software. If these systems don’t talk to each other, you’re left with data silos and a lot of manual work. A disconnected tech stack makes it incredibly difficult to apply revenue recognition rules consistently. The solution is to ensure you have seamless integrations between your key systems. When your technology works together, you can automate data flows and create a unified view of the customer lifecycle. This not only simplifies compliance but also provides a clearer, more accurate picture of your company’s financial health.
Now that you know what practical expedients are and how to choose them, let's get into the details. Applying them correctly is just as important as selecting them in the first place. When you’re dealing with high-volume transactions, having a clear and consistent approach is non-negotiable.
Here are some best practices to keep in mind to ensure you’re staying compliant and making your financial reporting as straightforward as possible. Getting these right will save you headaches during audits and give you a clearer picture of your company's health. A solid framework for applying these expedients is the foundation for scalable growth, and an automated system can help you implement these practices seamlessly.
If your business handles thousands of similar contracts, analyzing each one individually is not just tedious—it's impractical. This is where the portfolio approach comes in. ASC 606 allows you to apply revenue recognition rules to a group, or portfolio, of contracts with similar characteristics. The key condition is that the financial outcome of this grouped approach isn't materially different from analyzing each contract one by one. For example, you might group all your standard monthly subscription plans signed in the same quarter. This expedient is a lifesaver for high-volume businesses, as it streamlines the process without sacrificing accuracy.
What happens when a customer wants to change their contract halfway through the term? These contract modifications are common, but they require careful judgment to account for correctly. A modification could be treated as a termination of the old contract and the creation of a new one, or it could be a change to the existing contract. The path you take can significantly change the timing of your revenue recognition. Establishing a clear, documented process for reviewing and accounting for modifications is crucial. This ensures consistency and makes it easy to defend your decisions during an audit.
Sometimes, there's a long gap between when a customer pays and when you deliver the goods or services. If that period is over a year, you may need to account for a "significant financing component"—essentially, the time value of money. However, a practical expedient lets you skip this complex calculation if the period between payment and delivery is one year or less. For most businesses, this is a huge relief. It simplifies your calculations by allowing you to recognize revenue based on the agreed-upon price without adjusting for implied interest, which is one less thing to worry about when you close your books.
As a practical expedient, you can choose to exclude sales taxes you collect from customers from your transaction price. This means you can present your revenue "net" of these taxes, treating the collected amount as money simply passing through your hands on its way to the government. This is much simpler than recording it as revenue and then as an expense. The most important thing is to apply this policy consistently across all similar transactions and disclose your approach in your financial statements. This transparency is key for maintaining compliance and building trust with stakeholders.
If you run a private company, you get a few extra breaks when it comes to disclosures. The Financial Accounting Standards Board (FASB) recognized that nonpublic companies often have fewer resources for extensive financial reporting. As a result, private companies can opt out of certain disclosure requirements. For example, you don't have to disclose your use of the practical expedients for significant financing components or the costs to obtain a contract. These accommodations can reduce the reporting burden, giving you more time to focus on running your business. It’s always a good idea to consult with experts to ensure you’re taking full advantage of the options available to you.
Choosing to use ASC 606 practical expedients is a smart move for efficiency, but it comes with a critical responsibility: transparency. Think of it this way—you’ve found a great shortcut on a road trip, but you still need to be able to explain your route to anyone who asks. For your business, this means clearly communicating your choices to investors, auditors, and other stakeholders. Being upfront about the expedients you use isn’t just a compliance requirement; it’s a cornerstone of building trust. When stakeholders can see not only your revenue numbers but also the methods you used to arrive at them, it demonstrates a commitment to accurate and honest financial reporting.
Proper disclosure ensures that your financial statements provide a complete and fair picture of your company’s performance. It removes ambiguity and prevents potential misunderstandings down the line, especially during an audit. The goal is to make your financial story easy to follow, so anyone reading your reports understands that your methods are both sound and compliant. For more guidance on financial best practices, you can find a wealth of information in our HubiFi blog. Mastering this communication is just as important as implementing the expedients themselves, as it validates your entire revenue recognition process.
When you use practical expedients, you need to state it clearly in your financial statements. This isn't something to bury in fine print. The most common place for this information is in the footnotes. Specifically, you’ll want to include these details in the "Significant Accounting Policies" section, which is often the first footnote. You can also add them to the specific notes related to revenue recognition. Think of this as providing context for your numbers. It tells the reader, "Here’s our revenue, and here’s a clear explanation of the compliant, simplified methods we used to calculate it." This transparency is key to maintaining credibility.
The rules are straightforward: if you use a practical expedient, you must disclose it. This is a non-negotiable part of ASC 606. Your disclosure should identify which specific expedients your company has elected to use. For example, if you’ve chosen to expense contract acquisition costs as they are incurred, you need to state that explicitly. This simple act of informing stakeholders about your accounting policies ensures everyone is on the same page. It shows that you’re not just following the rules, but that you’re doing so thoughtfully and transparently, which is essential for passing audits and securing investor confidence.
Clear communication keeps your stakeholders—from investors to board members—confident in your financial reporting. When you decide to use a practical expedient, you are making an accounting policy choice. It’s important to explain this choice and apply it consistently. This helps stakeholders understand the financial impact and compare your performance over different periods. By being proactive with this information, you avoid confusion and answer questions before they’re even asked. It shows that you have a strong grasp of your financial operations and are committed to presenting an accurate picture of your company’s health.
Beyond public disclosures, your internal documentation is your first line of defense in an audit. You need a clear, accessible record of which expedients you’ve used and why. This documentation should detail your rationale for choosing a particular expedient, how it was applied to your contracts, and an analysis of its effect on your financials. This is where automated systems can be a game-changer. Having a platform that tracks these decisions and integrates with your other tools ensures your records are always accurate and audit-ready. If you want to see how automation can streamline this process, you can schedule a demo with our team.
Choosing and applying practical expedients is one thing, but managing them effectively over the long term is another challenge entirely. If you're relying on manual tracking in spreadsheets, you know how quickly things can become a tangled mess of version control issues and human error, especially as your business grows. This is where having the right technology becomes a game-changer. The right tools don't just store your data; they help you apply ASC 606 rules consistently, maintain compliance, and pull valuable insights from your revenue streams.
Investing in the right software isn't just about making your finance team's life easier—it's about building a scalable, auditable, and strategic foundation for your company's financial operations. With the proper system in place, you can move from simply reacting to compliance requirements to proactively managing your revenue with confidence. This shift allows you to focus less on manual data wrangling and more on what the numbers are telling you about your business. It transforms compliance from a burdensome chore into a source of strategic advantage, giving you a clearer view of your financial health and performance drivers.
Specialized revenue recognition software is designed to handle the specific complexities of ASC 606. It guides you through the standard’s core principles by automating the five-step process for every contract, from identifying performance obligations to recognizing revenue at the right time. Think of it as a central hub for all your revenue data, enforcing rules consistently and creating a clear audit trail. This is a significant step up from spreadsheets, which are not only prone to error but also lack the security and scalability needed to support a growing business. The right software ensures your calculations are accurate and your documentation is always ready for review.
Automation is your best friend when it comes to applying practical expedients correctly and consistently. Instead of manually deciding which expedient applies to each new contract, you can configure rules within a system to make those decisions for you. For example, you can set rules to automatically expense contract costs for contracts under one year. This reduces the risk of human error and frees up your team from repetitive, low-value tasks. By automating these processes, you ensure that your policies are applied uniformly across the board, which is exactly what auditors want to see. This allows your team to spend more time on strategic analysis rather than getting bogged down in manual compliance checks.
Your revenue data probably doesn't live in one place. It’s spread across your CRM, billing platform, and ERP system. A major challenge for many companies is pulling all this information together to get a clear picture. Without a system that can connect these disparate data sources, you’re stuck with manual data exports and reconciliations. This process is not only time-consuming but also a major source of inaccuracies. Look for a solution with seamless integrations that can centralize your data automatically. This creates a single source of truth for revenue, ensuring your financial reports are both timely and accurate.
Modern compliance tools do more than just process transactions; they turn your data into a strategic asset. ASC 606 often requires you to make estimates, such as determining variable consideration or the standalone selling price of performance obligations. The accuracy of these estimates depends entirely on the quality of your data. The right software provides the robust data analytics needed to develop and support these critical judgments. With real-time dashboards and reporting, you can monitor key metrics, forecast future revenue more accurately, and make informed business decisions. This level of visibility is crucial for both internal strategy and for confidently passing an audit.
Getting compliant with ASC 606 is a huge accomplishment, but the work doesn’t stop there. Think of compliance as a continuous practice rather than a one-time project. Your business is always evolving—you’re launching new products, updating pricing, and signing different types of contracts. Each of these changes can affect your revenue recognition.
Maintaining compliance means building a system of habits and checks that grow with your company. It’s about creating a sustainable process that keeps your financials accurate and your audits smooth year after year. By embedding these practices into your operations, you turn a complex requirement into a manageable, routine part of doing business. This proactive approach not only prevents last-minute scrambles but also provides a clearer, more reliable view of your company's financial health.
Set a consistent schedule to review your revenue recognition policies and contracts. A quarterly or semi-annual check-in is a great starting point. During these reviews, your team should re-evaluate how you apply the five-step process for revenue recognition to new and existing contracts. Look for any changes in your offerings, pricing structures, or standard contract terms that might alter how you identify performance obligations or allocate transaction prices. This regular cadence ensures that your accounting practices stay aligned with your business operations, preventing small discrepancies from turning into major issues down the road.
Accounting standards aren't set in stone, and your business certainly isn't either. It’s important to stay informed about any updates to ASC 606 guidance from the Financial Accounting Standards Board (FASB). At the same time, keep a close eye on internal changes. Are you bundling services differently? Entering new markets? These shifts can introduce complexities that your original ASC 606 implementation didn't account for. Creating a process to flag these business changes for financial review helps you adapt your revenue recognition approach in real time, ensuring you remain compliant.
Your finance team doesn't work in a vacuum. Sales, legal, and operations all play a role in shaping the contracts that determine your revenue. That’s why everyone involved needs to be well-versed in the core requirements of ASC 606. When your sales team understands how contract terms affect when revenue is recognized, they can structure deals that are both customer-friendly and compliant. Regular training sessions or simple, accessible guides can keep the entire organization aligned. This shared knowledge helps prevent non-compliant contract clauses from ever making it into a final agreement.
Building a safety net of quality control checks is essential for catching errors before they impact your financial statements. This can include peer reviews for complex contract assessments or setting up automated alerts for transactions that fall outside of standard parameters. Since assessing things like contract modifications requires significant judgment, having a second set of eyes is invaluable. With the right systems, you can ensure that your revenue recognition processes are not only followed but are also consistently accurate. Many businesses find that seamless integrations between their CRM, billing, and accounting software are key to making these checks effective and efficient.
What's the simplest way to think about practical expedients? Think of them as approved shortcuts. The official accounting rules for revenue recognition can be incredibly detailed and time-consuming. Practical expedients are specific allowances within the ASC 606 standard that let you use a simpler, more direct method to get to a compliant result, saving your team from getting bogged down in overly complex calculations.
Do I have to use practical expedients, and can I apply them to just some of my contracts? No, they are completely optional. You can choose whether or not to use them based on what makes sense for your business. However, the key is consistency. If you decide to use an expedient for a certain type of contract, you must apply that same method to all similar contracts. You can't pick and choose on a case-by-case basis to get a more favorable outcome.
What's a common mistake businesses make when implementing these? A frequent misstep is a lack of proper documentation. It’s not enough to just start using an expedient; you need to formally document which ones you've chosen, why they are appropriate for your business, and how you are applying them. Without this clear paper trail, you'll have a very difficult time explaining and defending your accounting policies during an audit.
How will using a practical expedient affect my financial statements? Using an expedient can change the timing or amount of revenue you recognize in a given period. For example, choosing to expense sales commissions immediately instead of capitalizing them will impact your profit in the short term. Because of this, you are required to disclose which expedients you use in the footnotes of your financial statements so that investors and other stakeholders have a clear and complete picture.
Once I choose an expedient, is the decision final? While you must be consistent in your application, your accounting policies aren't set in stone forever. Your business evolves, and your policies should be reviewed regularly to ensure they still make sense. If you decide to change your approach, you must have a valid reason and account for the change properly. The goal is to maintain a thoughtful, well-documented policy rather than making arbitrary decisions.
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.
Copyright © 2025 HubiFi | All rights reserved.
