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Revenue Recognition for Hardware Integrated with SaaS and Installation.

revenue recognition for hardware integrated with saas & installationVendor provides an integrated solution which requires a SaaS application, hardware, and installation service in order to provide functionality.  The SaaS application does not provide functionality without the hardware and the Installation. The hardware is also sold alone by third party vendors. However, the Vendor loads proprietary software on the hardware before shipment to the Customer. The Customer buys, and pays for, the hardware. The hardware is then installed and the Saas customized to fit the Customer’s unique requirements. The Customer signs an Acceptance Certificate.

Question: - Does the Vendor (a) recognize the hardware revenue upon acceptance; (b) recognize the hardware revenue ratably over the SaaS subscription period; or (c) treat the hardware revenue as an up-front set-up fee that is required in order to use the SaaS, and thus amortize the hardware revenue over the expected customer relationship period (which is longer than initial subscription period)?

Answers

Topic Expert
J.D. Floyd
Title: Owner, CFO
Company: CFO Outsourcing Solutions, Inc.
(Owner, CFO, CFO Outsourcing Solutions, Inc.) |

Simple answer; assuming you have all the elements of (evidence) a sale for the hardware, you can (will) recognize upon proof of delivery of hardware. All professional fees recognized upon delivery and SaaS element(s) ratably upon the life of the subscription/contract.

J.D. Floyd

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

Agree with answer above. With EITF 08-1 (ASU 2009-13), you are required to separate the elements for SaaS contracts and recognize the elements separately as long as they each have standalone value (basically defined by whether it is available from other vendors). So the hardware would be recognized up front, and the SaaS fees ratably. Note that this new guidance also impacts implementation services, which would previously have been spread over the SaaS period but now can (and must) be recognized separately/earlier.

Konrad Sosnow
Title: Revenue Recognition Guru
Company: Konrad M. Sosnow & Associates
(Revenue Recognition Guru, Konrad M. Sosnow & Associates) |

Thanks for your input!

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

Hello Konrad, thank you for a very interesting question!
My input will be quite different from others though: we are vendors of an integrated software solution for the hospitality industry that requires hardware, but in our situation, we prefer (c) for many different reasons:

1) We decided from the start that we'd remain conservative and show the steady increase in our revenue corresponding to the steady increase in the number of our contracts over the years, not the peaks and valleys that would come inevitably with the recognition of the hardware and implementation fee upfront.

2) Our contracts are usually high-value 3-year agreements and each project may span up to 6 months prior to deployment, with the hardware (if any) being purchased at any time during those 6 months and representing up to 1/2 the value of the contract.

3) Depending on the customer situation, we might have to lease the hardware to them, or retain ownership at all times, or purchase as agents... But not all of our customers ask us to buy the hardware for them either, and actually more of them are buying it themselves nowadays.

4) Hardware cost has been slashed by 4 in the past 3 years, as we've moved from $1,600 touch-screen computers to $400 tablets... and the new Android tablets will soon be available for half that amount!... Recognizing the hardware revenue upfront would have brought a fictitious decrease in overall revenue these past 3 years!

5) Our pricing and payment terms include both SaaS, Capex and Opex models, with any blend in-between to best adapt to any type of customer!

So really, for us, amortizing hardware revenue (if any) over the length of the contract is the only way to treat all contracts the same way. Furthermore, it shows consistency across the board and allows for the least amount of dependency over hardware fluctuations (in prices and volumes), not to mention more accurate financial projections.

I would love to hear more comments from the rest of the Proformative community!

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

You will need to analyze for VSOE (verified specific objective evidence) or establish a ESP (estimated selling price) for each of the "elements" in order to separate the amounts for each (...you cannot just rely on the the PO/invoice amounts alone).

Topic Expert
J.D. Floyd
Title: Owner, CFO
Company: CFO Outsourcing Solutions, Inc.
(Owner, CFO, CFO Outsourcing Solutions, Inc.) |

@Bob,

VSOE is for an SOP 97-2 software with multiple elements arrangement and while you are correct in how you would deal with SOP 97-2, but this ia a SaaS arrangement.

(disclaimer that we do not have all the facts). Assuming this is truly SaaS, then it is hardware at delivery, professional services (if any) to install if more than deminimous would be rateable recognition of subscription revenue / SaaS. In the case of the professional fees to install, if it is actually quoted to the client then it would be included with the same SaaS schedule.

The situation above is very common for a lot of new SaaS & hardware deals such as desktop drives for local backup and then Cloud based "mobile" storage.

J.D. Floyd

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