ASC 606 & SaaS

For years, SaaS finance teams often ignored credit risk. After all, software isn’t shipped — if a customer stops paying, you can often just disable access. But under ASC 606, that assumption is risky: revenue can be recognized before cash is collected, meaning defaults may lead to reversals, impairments, and judgmental adjustments.

The Core Shift Under ASC 606

At its heart, ASC 606 demands that revenue be recognized as performance obligations are satisfied — not simply when cash arrives. Its five-step model (identify contract, identify obligations, determine price, allocate, recognize) applies across industries.

Deloitte frames it this way: The core principle of the revenue standard is to depict the transfer of promised goods or services … in an amount that reflects the consideration to which an entity expects to be entitled. That phrase — “expects to be entitled” — introduces inherent judgment about collectability. (Deloitte, Interpretive Guidance) (via Deloitte ASC 606 Interpretive Guidance)

Moreover, ASC 606 doesn’t let you avoid credit risk simply by delaying billing. When you perform services but can’t yet bill or collect, you hold a contract asset, and that asset must be assessed for credit losses under ASC 326-20. Deloitte states: A credit loss of a contract asset shall be measured, presented, and disclosed in accordance with Subtopic 326-20. (Deloitte Roadmap)

Why SaaS Historically Downplayed Credit Risk

The SaaS model has several built-in assumptions that downplay credit risk:

• No inventory, no shipment: Unlike manufacturing, SaaS involves no goods in transit. Nonpayment often leads to suspension rather than recovery.
• Recurring or prepaid billing: Many SaaS firms collect via prepaid models, credit cards, or automatic renewals, limiting exposure.
• Growth mindset & capital buffers: In early phases, absorbing occasional defaults seemed acceptable in pursuit of growth.
• Collections as afterthought: Credit checks, limits, and risk frameworks were often deferred.
• The “turn-off” illusion: Because you can disable access, defaults were sometimes treated more like churn than credit failures.

But that logic begins to crumble when contracts scale upward — enterprise deals, multi-year terms, onboarding costs, and customization raise the stakes.

Why Creditworthiness Must Be Elevated Today

Ignoring credit risk under ASC 606 exposes you to:

• Revenue reversals: You may have recognized revenue that later must be adjusted if payment becomes doubtful.
• Cash flow mismatch: Strong ARR on paper may not translate to strong cash inflows — especially in tight capital markets.
• Investor & audit scrutiny: Revenue quality is under scrutiny. Weak assumptions around collectability invite pushback.
• Stranded costs & sunk investments: Onboarding, implementation, etc., are real costs you can’t recoup if customers default.
• Misaligned internal incentives: If sales close deals without credit gating, finance often bears the burden.

KPMG underscores the difficulty: software and SaaS firms must make significant judgments and estimates — especially on performance obligations, price allocation, and contract modifications. (KPMG Handbook: Revenue for Software & SaaS)

Deloitte also cautions that contract arrangements often include “a myriad of criteria” complicating application of ASC 606. (Deloitte Roadmap / On the Radar)

Embedding Credit Risk in SaaS Revenue Strategy

1. Credit review at onboarding: Require financial diligence or credit scoring for large or higher-risk contracts.
2. Ongoing credit monitoring: Use external/internal signals (public filings, trade data) to detect red flags.
3. Portfolio-level allowances: Use ASC 606’s practical expedient to group similar contracts (if material difference is negligible).
4. Credit-based contract clauses: Incorporate deposits, milestone billing, termination rights, or other safeguards.
5. Align accounting & collections: Ensure revenue recognition assumptions reflect real collection history.
6. Disclose & stress-test assumptions: ASC 606 demands transparency on credit judgments, impairment methods, and sensitivity analyses. (Deloitte Roadmap – Disclosures)

As SaaS scales, creditworthiness becomes a front-line measure of true revenue quality.

Frequently Asked Questions (Q&A)