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Revenue Recognition For Cloud Based Sales

Hi Everyone, I recently joined a SaaS startup and we are building a pricing model for our cloud based hosting product divided into "On Demand" pricing, " 1 year term" and "3 year term" arrangements. The prices are bundled (Cost of license, Training & Implementation) and the implementation work is not much for our type of product and most of the price paid, i should say is towards the license cost. We receive the payments upfront on providing the invoice to our customers and as the business is new, we are not sure about the renewal pattern of customers. (1) In this backdrop, what would be the appropriate accounting for revenue recognition under existing USGAAP (2) What are the Federal Tax implications in accounting so?

Answers

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

License fee is recognized ratably over the term of the arrangement. Implementation fees can only be recognized over the implementation period if you can demonstrate standalone value (see EITF 08-1), primarily if other vendors could also do the implementation. If not, implementation fees are also recognized over the license term.

SRIDHAR RANGANATHAN
Title: Head-Finance
Company: Emulex Communications
(Head-Finance, Emulex Communications ) |

Thanks Doug,

When we recognize over the implementation period, does it mean, we need to periodically divide the revenue.i.e. if the total invoice value , say is $ 5000 over a 1 year term, for our monthly closure of financials, should $ 5000 divided over 12 months period?

Additionally, please confirm if the ASC topics related to this are ASC 605-25 and SAB Topic 13.A.3(f) (or) anything else we should refer and adopt?

Didier Jupillat
Title: CFO
Company: Atlantic.net
(CFO, Atlantic.net) |

Sridhar, I would advise you to think of payment terms and revenue recognition as 2 different "animals"! Like Doug pointed out, the license fee needs to be recognized ratably over the term of the contract. So if the amount corresponding to the license in your contract is $5000 over 12 months, then the MRR is $416.67. If you invoice the client for the whole $5000 upfront, then $416.67 goes to Revenue on month 1 and the difference sits in Deferred Revenue, until the whole deferred amount is depleted at the end of month 12.

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