Software revenue recognition saas

Nick Burgmeier Partner, Dept. Scott Muir Partner, Dept. Key impacts ASC was issued in and is now effective for all entities. Report contents Software and SaaS industry overview Scope Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when or as the entity satisfies a performance obligation Contract modifications Contract costs.

Related content. Handbook: Revenue recognition. Blend-and-extend modifications related to a cloud-based or hosted software arrangement Download the PDF Cloud Accounting: Dealing with the ever-growing complexity podcast is now available here. In this episode, David Linthicum and senior consultation partner Sandie Kim discuss the complexities of accounting for cloud.

She is a She provides consultations to clients and audit practitioners on complex financia He has more than 15 years of experience providing assurance, accounting, and other professional se To stay logged in, change your functional cookie settings. Please enable JavaScript to view the site. Viewing offline content Limited functionality available. My Deloitte. Undo My Deloitte. Cloud-based revenue recognition for technology companies Understanding the accounting for cloud-based services.

Save for later. Applying the ASC revenue standard to software licenses when adopting cloud services and forfeiting on-premise rights Some software licensing contracts include an option for customers to convert from on-premise to cloud-based hosted software e. Applying the revenue standard to identify performance obligations in arrangements including smart devices, updates, and cloud-based services Many technology organizations offer solutions in which a customer purchases: A smart device with embedded software components firmware ; Maintenance and support postcontract customer support, or PCS ; or A cloud-based service.

Accounting for implementation services related to a cloud-based or hosted software arrangement Entities that sell a cloud-based or hosted software solution—such as a SaaS arrangement—often include implementation services that are performed either at the outset of the customer arrangement or during the SaaS term. Accounting for cloud-based or hosted software arrangements with variable consideration Entities that sell cloud-based or hosted software solutions often require the customer to pay them a variable amount, usually based on the underlying usage of the SaaS technology.

In a typical blend-and-extend modification in the SaaS industry, the entity would account for such a modification as either: A separate contract for the added services under ASC , or A termination of the existing contract and the creation of a new contract under ASC a The determination of which model to apply is based on whether the additional services are priced at their stand-alone selling prices.

Cloud Accounting: Dealing with the ever-growing complexity podcast is now available here. Get in touch. Secondly, the customers have the right to operate the software on personal system or have a third party do it on their behalf.

Both of these obligations were met before the introduction of cloud-based software. Customers used to purchase software and use it according to their own needs. Software companies could record the revenue right after the transaction as both revenue recognition stipulations were met.

But not now when software has moved to the cloud. Now, SaaS companies have a revenue recognition problem. Their customers generally book for a year in advance. Companies have cash in their hands but they cannot recognize it because revenue recognition conditions are not met. So, that is a real problem for SaaS companies. Therefore, earned cash is not immediately recognized as revenue. Rather, SaaS revenue recognition takes place through spreading cash earned over the delivery period.

The SaaS revenue recognition process is totally different from the revenue recognition of any other business. It is simply against the SaaS business principle to allow customers to own the software, operate it their personal systems, or get a third party to do it. On the other hand, customers prepay for the software service for the commitment of receiving the service for a particular time period.

There is no point where you can mark service delivery as completed. So what now? Will you report the revenue the very moment cash comes into your hands or will you not report the revenue until the delivery period expires? SaaS businesses were allowed to book revenue as they wanted. Now, ASC accounting standards have changed the prior practice. Now, SaaS companies have some rules to follow.

ASC accounting standards have laid down steps to follow before revenue recognition of each contract. To summarize those five steps — SaaS companies can only recognize revenue after deciding contract terms with a customer when the contract obligations are met. The company provides different software solutions. A customer purchases subscription for one of its software. The customer prepays the whole contract price. Now, should SaaS Inc. The first thing is to book cash in hand as deferred revenue.

Now, the next step is, and the flexible one, to break down the delivery period into smaller timeframes for revenue recognition. The delivery period breakdown is up to the SaaS company. They can break it down into days, weeks, or months. However, days is the shortest SaaS billing cycle and is, therefore, recommended.

So, SaaS Inc. But, there is still a problem. What do you have to do with the unrecognized revenue? The cash in hand cannot be considered as revenue because service has not been fully provided yet. So, what you have is not revenue earned but deferred revenue or unearned revenue. The amount only becomes earned revenue when the service is provided.