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Defer discounts?

John Veloski's Profile

I started with a SaaS company a few months ago. Their typical sale is a 3-year SaaS subscription which locks in the first year with material penalties if a customer cancels out in year two or three. A significant number of customers get a discount (5%-20%) on the first year’s fee and then years two and three are at the list price. The contract CFO before me has been recognizing the discounts all immediately and then deferring the revenue over 12 months. Also, there are professional services involved in getting the site set up for the first year and while these amount to maybe 10% of the subscription price, they’ve been recognized all up front. While I could make an argument for a number of different ways of doing this, my feeling is that the discount for year one should be deferred and recognized over the same period as the revenue. Same with the professional services. Anyone have some insight here? Thanks,

Answers

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

John:
You are very much on the right track. The best guidance is probably going to be the SEC revenue recognition guidance (codified in SAB Topic 13 - you can find that on the SEC's website at sec.gov), with most of the relevant discussion being in A.3.f Nonrefundable up-front fees.
The first step will be to determine whether the professional services are a separate element under the multiple element guidance. Generally, though, set-up fees do not represent the culmination of a separate earnings process so would not be a separate unit of accounting.
Most likely, therefore, you will end up taking the total arrangement fee (i.e., 3 years of subscription, less first year discount, and plus professional services) and recognizing that total amount on a straight line basis over the 3-year subscription period.
You should be able to defer the direct, incremental costs of the professional services and amortize those over the same period.

John Veloski
Title: CFO
Company: MCN Healthcare
(CFO, MCN Healthcare) |

Hi Stephen,

Thanks for your response, but I'm a little confused. Are you saying that the discounts and professional services should be deferred over the 3-year contract even if the customers can cancel after the first year? Personally, I would prefer to recognize both the discounts and professional services each month over the first year, but as we will be having our first audit at the end of this year, I would like to avoid any adjustments.

Thanks,

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