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Does an auto-renewal clause in a subscription software contract provide enough evidence of a legally binding arrangement?

Does an email confirmation from the customer of intent to renew suffice? What if there are differences between the original products purchased and the products renewed? If a customer emails all the details that would be contained in a standard order form does this constitute sufficient evidence of a binding arrangement for rev rec? Can the vendor begin revenue recognition based on invoices generated automatically for any contract with an an auto-renewal clause?

Answers

Peter Lyons, MBA, CMA
Title: Finance and Technology Enthusiast
Company: Currently Looking
(Finance and Technology Enthusiast, Currently Looking) |

Without knowing how your current contracts read, I'm unable to give you an answer with great substance. Your questions really depend on what clauses you have embedded in your current agreements in regards to auto-renewal, etc.

Typically, I've found the safest bet when dealing with contracts is to have it all spelled out and formally executed. This can be done a couple of different ways (i.e., amendment to the current agreement, signed/dated side letter, executed PO, etc.)

I would run your questions by your legal team and see what type of feedback you receive from them.

Best Regards,
Pete

Mark Stokes
Title: CFO
Company: Private
(CFO, Private) |

This question is great, but it is loaded with "facts and circumstances" issues which both your legal counsel and your audit partner would want to weigh in on. Taking these one at a time:

Q:Does an email confirmation from the customer of intent to renew suffice [as a legally binding arrangement]?
A:It may, if they were sufficiently specific about the agreement they were referring to and if that agreement was clear about means/modes of communicating renewal. Definitely ask your counsel and make it crystal clear in your legal documents in the future so that you can rely on something as simple as an email from the customer. If you even have to ask this question, i would suggest that your agreement might not be clear enough to support a definitive conclusion.

Q:What if there are differences between the original products purchased and the products renewed?
A:Now you've realy got some documenting to do. Here I would agree directly with Peter that you need to create a new agreement to handle items not contemplated in or different than your original agreement. This may be in the form of an amendment or the like. Ask counsel.

Q:If a customer emails all the details that would be contained in a standard order form does this constitute sufficient evidence of a binding arrangement for rev rec?
A:Maybe. Depends on your form of agreement with the customer. Ask your audit/accounting firm for their take. They will need to see the original agreement.

Q:Can the vendor begin revenue recognition based on invoices generated automatically for any contract with an an auto-renewal clause?
A:Have to ask audit/accounting firm. It will depend on the language in your contract and whether you have a PO in place or other elements that prove there is:
* Persuasive evidence that an agreement exists
* Delivery has occurred or services have been rendered
* The seller’s price is fixed and determinable
* Collectability is reasonably assured
Those are the unwavering core elements for rev rec, with exceptions/differences for certain types of arrangements.

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