Key Takeaways
- Private companies continue to face challenges with ASC 606 compliance, especially with bundled services, variable pricing, and contract changes.
- To keep up with the complexity of revenue, internal controls, documentation, and IT systems must evolve.
- As private companies look to evolve into recurring or subscription revenue models, revisiting the application of ASC 606 remains top of mind for many CFOs.
- Annual process reviews and working together across departments are very important for making sure that everyone follows the rules and is ready for audits.
Lessons Learned, Risks to Avoid, and What’s Next for Private Companies
Revenue recognition under ASC 606 has been in place for some time, but it still raises challenging questions for CFOs and controllers — particularly in highly regulated industries such as healthcare, where revenue arrangements are often complex. Private companies are actively refining their implementation strategies and preparing for upcoming audits. Many are discovering that compliance alone isn’t sufficient; they require tighter controls, improved documentation, and enhanced collaboration across teams.
The Five-Step Framework: Still Relevant, Still Complex
How do auditors assess this process for private companies? Look at the following:
Step 1: Identify the Contract
- Do you have signed agreements or enforceable terms?
- Have you assessed customer credit risk and their ability to pay?
Step 2: Identify Performance Obligations
- Are your promises clearly defined and distinct?
- Have you considered bundling products and services together?
Step 3: Determine the Transaction Price
- Did you account for discounts, variable fees, and non-cash expenses?
- Are there any financing arrangements or contingencies?
Step 4: Allocate the Price
- When possible, do you use prices that can be seen and stand alone?
- Have you formally documented the allocation logic for bundles or custom contracts?
Step 5: Recognize Revenue
- Are you recognizing revenue solely upon the transfer of control?
- Is timing aligned with actual delivery — not billing?
The model is conceptually straightforward, but real-world application is anything but. Most challenges emerge in the details, especially for companies managing multiple revenue streams, bundled offerings, or variable pricing.
Common Pain Points CFOs Still Face
Even several years after the implementation of ASC 606, we still see the following issues arising:
- Performance obligations: Deciding whether to account for deliverables separately or together takes careful judgment. The outcome directly influences when and how revenue is recognized.
- Transaction price allocation: Bundling services or incorporating escalators makes it essential to allocate prices fairly and consistently, yet this concept is often misunderstood.
- Variable consideration: Rebates, discounts, and usage-based pricing can skew revenue timing. To estimate these amounts accurately, you need historical data, forecasting models, and collaboration between sales and finance.
- Contract modifications: Considering adding a service while your contract is ongoing? Are we changing the scope? These changes may result in a new contract or a modified one, each carrying distinct accounting implications.
- Costs to obtain contracts: Accounting for commissions as costs to obtain contracts can be tricky as many private companies are looking to use commission payments as retention tools. The timing of commission payments can affect the accounting for those payments.
Implementation Tips for Private Companies
Even years after adopting ASC 606, many private companies continue to refine their processes. Here are some key lessons seen in early implementations:
- Start with contract inventory: Many teams overlook the diverse range of contract types involved. Mapping these out early reveals nuances that affect performance obligations and pricing.
- Involve cross-functional teams: Accounting needs collaboration to succeed. Bringing together legal, sales, operations, and IT helps teams consider all perspectives when making revenue recognition decisions.
- Document your rationale: Even if revenue results remain largely the same, spending time on documenting assumptions, judgments, and controls helps make audits smoother and enhances internal clarity.
Industry Watch: SaaS and Subscription Models
If your company uses a recurring revenue model, you probably encounter:
- Subscription escalators: These create contract assets when we recognize revenue before invoicing.
- Bundled implementation and support services: It can be unclear to distinguish what constitutes a separate obligation.
- Commission tracking and capitalized costs: High-volume SaaS firms can no longer rely on manual tracking.
As SaaS continues to grow, CFOs should keep these revenue issues in focus.
Internal Controls: The 2026 Perspective
ASC 606 not only changes accounting but also transforms how companies approach revenue-related controls. Here are the key areas we need to focus on:
- Mapping controls by revenue stream
- Applying judgments consistently (for example, standalone selling price)
- Integrating IT systems to automate tracking and reporting
- Monitoring and revising controls when new products or terms are introduced
Audit teams are focused on more than just the numbers. They want to understand how those figures were calculated, what controls are in place to support them, and whether those controls are functioning effectively.
In many private company audits, auditors may not be testing the operating effectiveness of revenue controls. Instead, they will be focused on certain “identified controls” over revenue balances. Having a robust, detailed and documented review of revenue on a disaggregated basis may give your auditors a more efficient approach to evaluating the design, implementation and operating effectiveness of your revenue controls.
Disclosure Requirements: Minimal Does Not Mean Simple
Private companies may have fewer disclosure requirements compared to public ones, but that doesn’t make the process any easier. As discussed in healthcare audit environments with heightened regulatory scrutiny, auditors continue to expect:
- Assistance with detailed revenue figures
- Significant judgments explained, such as timing of recognition and allocation methods
- Documentation of any practical expedients utilized, like the portfolio approach
Strategic Advice for CFOs and Controllers
ASC 606 compliance goes beyond just accounting; it presents a chance to enhance internal collaboration and improve your business’s approach to contracts, customers, and risk. To maintain an edge:
- Annually re-evaluate your revenue recognition processes
- Engage audit, tax, and advisory teams in process reviews
- Utilize automation whenever feasible
- Provide training for teams across departments
Working with experienced advisors can effectively bridge gaps in expertise and make sure your revenue strategy aligns with your growth goals.
Building Confidence in Your Revenue Recognition Process
Does your team feel confident in its revenue recognition processes and internal controls? If that’s the case, it’s time to act. LBMC’s audit and assurance professionals assist companies in:
- Strengthening internal control environments
- Preparing for smoother audit cycles
- Aligning revenue processes with operational strategy
Contact LBMC to assess your ASC 606 readiness and develop a framework designed to support accuracy, compliance, and strategic growth.
LBMC is ready to assist you in navigating revenue recognition with confidence and strategy. Let’s have a conversation.
Content provided by Matt Smith, Shareholder in the Audit division of LBMC, PC.
FAQs: Revenue Recognition and ASC 606
1. Is ASC 606 still a top audit issue in 2026?
Yes. Most companies have adopted the standard, but auditors are still focusing on its consistent and accurate application, particularly in industries with complex or recurring revenue.
2. Can we adopt a portfolio approach for customer contracts?
Yes, if you can reasonably expect that the financial statement effects will not differ significantly from applying the standard to individual contracts. Companies often organize contracts based on service type or customer class.
3. What’s the best way to manage contract modifications?
The answer depends on the nature of the modification. If it introduces unique goods or services, it may qualify as a separate contract. This is particularly true when those goods or services have a standalone price. If that’s the case, you might need to make cumulative or prospective adjustments to the original contract.
4. What internal controls should we have for ASC 606?
Controls must address contract approval, identify performance obligations, determine allocation methods, manage price adjustments, and establish recognition timing. You should prioritize documentation and review controls as these have the highest likelihood to increase audit efficiency and identify material errors.
5. Are private companies required to disclose contract balances?
Yes, but to a lesser extent than public companies. You need to focus on the key disclosures, which include the opening and closing balances of contract liabilities for all periods presented in your financial statements. These also include qualitative descriptions of significant judgments.
6. Do we need new systems to comply with ASC 606?
Companies do not necessarily need additional systems. Organizations with high-volume or complex contracts often benefit from purpose-built tools. They may also gain efficiency from enhancing their existing ERP and reporting systems.
7. When is the right time for us to take another look at our revenue processes?
It is recommended that you evaluate at least once a year, or anytime there are substantial changes to contracts, service offerings, or corporate strategy.