Since its implementation on January 1, 2019, the FASB Accounting Standards Codification (ASC) 606 has significantly impacted how privately owned software and Software-as-a-Service (SaaS) companies recognize revenue. Six years later, in 2025, these businesses continue to grapple with the complexities of ASC 606, particularly as business models evolve and regulatory guidance becomes more refined. The revenue recognition challenges remain, but new insights and strategies have emerged to help companies comply effectively.
As you finalize your financial reporting for the 2024 calendar year, several key revenue recognition challenges could continue to surface. Below are the top three areas where software and SaaS companies often face the most hurdles when applying the ASC 606 guidance (and what you can do about them).
Implementation services often involve installation, integration, data migration and other professional services bundled together in a software or SaaS contract. Historically, many companies assumed these services should be recognized as revenue over time, believing they were so interrelated with the software subscription that they didn’t qualify as distinct.
Under ASC 606, however, it's essential to assess whether the implementation services are truly distinct from the software. If your customer can self-implement or hire a third party, these services may be considered distinct, and you should recognize revenue at the point at which the service is completed. On the other hand, if the services are integral to your software’s functionality and cannot be separated, recognize the revenue over time.
In 2025, the challenge for many companies remains understanding the full nature of the services provided and the customer’s dependency on them. You will need to assess whether your customer is buying the services out of necessity to use the software or simply for convenience. For instance, as cloud adoption accelerates, businesses increasingly face the question of whether implementation services like cloud migration are distinct or part of the overall software solution. This evaluation remains central to revenue recognition compliance under ASC 606.
In response to these challenges, review your client contracts to determine if they clearly separate the implementation services as distinct. Then consider documenting a detailed revenue recognition policy and include key criteria around implementation services, including stand-alone value, third party availability of services and interdependency. By formalizing documentation around implementation services, you can improve the accuracy and consistency of your revenue recognition.
Like implementation services, professional services — such as training, custom development and consulting — pose similar challenges in determining whether they are distinct from the core software subscription. Under ASC 606, a service is distinct if it can be sold separately or outsourced to a third party. If it is distinct, the vendor can recognize revenue once the service is complete.
Software and SaaS companies increasingly offer complex professional services tied to their software products, making this assessment more challenging. If your service spans a long period and includes milestones, the vendor must determine whether control of the service has transferred to the customer at each milestone and whether an enforceable right to payment exists.
In practice, milestone-based revenue recognition remains a tricky area in 2025. As many software companies shift to subscription models, customers often expect ongoing customization or service delivery throughout the contract term, further complicating when revenue should be recognized. The ASC 606 guidance on variable consideration and milestone payments will require your company to apply significant judgment to ensure you are appropriately recognizing revenue as services are performed, rather than deferring too much or recognizing too early.
In response to these challenges, review your contracts for wording around when professional services are complete and when control has transferred. A contract with vague or poorly written terms may result in incorrect revenue recognition. Updating these terms in your contracts for professional services will help with the consistency of your revenue recognition.
Software and SaaS contracts frequently involve multiple performance obligations, such as software licenses, support services and professional services, all tied together in one contract. ASC 606 requires companies to allocate the total transaction price to each performance obligation based on its stand-alone selling price (SSP).
Estimating the SSP for each obligation remains a challenge, especially if your company does not have adequate historical data or sells products primarily as bundles. ASC 606 allows for flexibility in determining SSP by looking at observable prices, competitor pricing or internal estimates.
In 2025, however, companies have refined their approaches, using market-driven data and internal pricing lists. The rise of SaaS has led to increasingly complex subscription models, often involving tiered pricing structures, AI-driven software modules and customized support packages. The challenge is to create a systematic approach to pricing individual components of these bundled contracts.
In response to these challenges, many companies are developing more sophisticated pricing policies and procedures, which help streamline the SSP determination process. By formalizing pricing strategies and documenting them thoroughly, you can improve the accuracy of your SSP estimates, helping to get to better revenue recognition outcomes.
While the initial implementation of ASC 606 posed significant challenges, ongoing compliance continues to create complexities for privately owned software and SaaS companies. The need to carefully distinguish between distinct and integrated performance obligations, recognize revenue based on customer control, and accurately estimate stand-alone selling prices underscores the importance of detailed contract analysis and robust internal systems. By addressing these challenges, your company can help ensure your revenue recognition practices align with the principles of ASC 606, promoting greater transparency and consistency in your financial reporting.
Contact Brian Fiedler or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.