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Accounting For SaaS Revenue Recognition

We are a SaaS based startup company, and have annual upfront invoicing. That means our customers prepay us for the services rendered in next 12 months. I want to know how do we book a contract in this particular situation. For eg- A SOW was signed for x amount in Jan 2016 with quarterly billing structure. Services were supposed to start in Feb 2016. So first invoice for y was raised by Feb 1, 2016 for 2 months of Q1 and then recognized over 2 months. Now how much do we show the booking. x or y. Appreciate your help. Thank you.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

This would be the norm for an invoice for services that are bill before they are performed.

If you invoice for 12 months, in advance, then it is booked to unearned revenue. Each month used is then reversed out of unearned and into Sales.

There may be specific GAAP rules for the software industry that modify the above statement.

Jon Placa
Title: Director of Finance and Operations
Company: NarrativeDx
LinkedIn Profile
(Director of Finance and Operations, NarrativeDx) |

Wayne's comment is spot on.

Also note that any "Implementation/Onboarding Fees" can no longer be recognized upfront (this used to not be the case)

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Here is my advice (and for most start-ups) ....

Spend the few thousand dollars to get a formal opinion from a respectable CPA firm regarding your revenue recognition practice. This is a major part of your business model.

Although I respect and value a lot of commentators here, when you are faced with an audit (external or IRS), you can't tell them that you got your information/advise from a forum. Granted that your case may be a straightforward case, it does NOT hurt if you get a formal documented opinion. Even if it just confirms what every one else is saying, this is money well spent. It will also be a good backstop for investors looking at your firm.

Don't be a Groupon and find out later that you have been doing things wrong and need to revise your statements.

And BTW, for what it is worth, I agree....Unearned Revenue.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

While you are getting your opine, ask about Sales Tax.... both in your home state and across the nation. That's a gottcha that can put you in real hot water.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

And on the topic of sales tax, if you have nexus in the City of Chicago, or sell SaaS services to customers in the city, make sure you know your obligations regarding the "Cloud Tax" that came into effect 1/1/16.

Anonymous
(General Manager) |

Wayne, Jon, Emerson and Len - Thank you so much for your response and feedback.

Wayne - Is my understanding correct that we should book the SOW value.

Thanks!

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

Agreed with the feedback from the various respondents and yes I would base bookings on the total committed contract value. As you pointed out the billings can / will be different in your business and I wouldn't have those form the basis for the bookings metric.

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