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SaaS Revenue Recognition

SAAS revenue recognition

I just joined a software-as-a-service company in the finance department (small company, very small finance department).  I do not have previous SAAS experience as I was previously in a different industry.  

The company's former auditors (they reviewed, not audited, the financials) approved the revenue recognition policies.  However, the company has experienced enough changes that I would like to reexamine the revenue recognition policies.

Can anyone point me to the "top 3" pieces of accounting literature I should first review- this is a software-as-a-service company that sells online subscriptions,  occasionally provides training to their customers, and sells service-hour bundles to their subscription customers (not to anyone else).

Thank you very much.

 

Answers

Derek Quackenbush
Title: CFO
Company: Rising Data Solutions
(CFO, Rising Data Solutions) |

Rev rec can be complicated as you know. SaaS not tricky, but some things to consider. Per our audit, for contracts that are true hosting arrangements (i.e., service arrangements where customer cannot take possession of the software), we used ASC 605 for revenue recognition and simply amortized up-front payments over the life of the arrangement (true GAAP is over estimated life of customer relationship, but we were new and had no real history in this regard) and recognized the monthly fee each month as the service was performed. Some of our contracts allowed for the customer to take possession of the software even though we hosted the software, in which case we used ASC 985 (Software Revenue Recognition) where we did basically the same thing. Big tricky item in both situations is other "stand-alone" services/offerings you may provide under one agreement and whether they have stand alone value. For an early stage SaaS provider, it's hard to prove this, actually. If you can't prove it, everything gets deferred and amortized over the period described above. We really dug into our situation with our auditors, which was very helpful. I strongly recommend whatever rev rec review you undertake be done in conjunction with your auditors. Hope this helps.

Dan Jebens
Title: CFO
Company: ToolWatch Corp
(CFO, ToolWatch Corp) |

You may find some recorded presentations on this site (Jim Brendel did one I think). They may be labelled as EITF 8-1. If you can't find one on this site try NetSuite or IntAcct's site. Tony Sondhi has some webinar's about the new rules, see svacpa.com. Most of your issues will likely be around mutli-element arrangements and Estimated Selling Price. Good Luck.

Rod O'Connor
Title: VP & CFO
Company: Reeher LLC
(VP & CFO, Reeher LLC) |

I agree with Dan's summary and have found many of the resources he mentioned helpful. PWC has a site with some helpful references as well at http://www.pwcrevrec.com/

I would also recommend reading through some publicly traded SaaS company 10-Ks to familiarize yourself with the issues.

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

Chitra:
My suggestions on the "top 3" pieces of literature would be as follows:
1. ASC 605-25 guidance on multiple element arrangments (also known by its old names of EITF 08-1 and ASU 2009-13). I would actually start with one of the Big 4 firm's guides that are available online - for example, Deloitte has an excellent Roadmap series (go to www.Deloitte.com, search for "roadmap" and you should get a list of the available titles including one on multiple element arrangements).
2. ASC 985-605, if any of the elements are software - most true SaaS arrangements are services, not software, but there are many different arrangements out there and, as Derek mentioned, sometimes "SaaS" contracts may allow customers to take possession of the software. Again, Deloitte and others have excellent roadmaps that can help you navigate through the applicable accounting guidance.
3. SEC SAB Topic 13 (Revenue Recognition) provides useful guidance and examples in applying GAAP revenue recognition principles - for example, it covers the treatment of nonrefundable upfront fees such as the setup fees that are common in SaaS arrangements. The SEC guidance is available at www.sec.gov if you don't have access through other accounting research services.
Hope this helps.

Caprice Murray
Title: Principal
Company: Tensoft
LinkedIn Profile
(Principal, Tensoft) |

In addition to the other great suggestions here, you want to review the recording of "Revenue Recognition Accounting for Cloud Computing (SaaS)" presented by software revenue recognition expert Jeffrey Werner, who'll also be offering a 7 hour online training class on June 11 and 13th. You can find other recorded SaaS revenue recognition webcasts on Tensoft's website as well.

Topic Expert
Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

To add to Caprice's point - online training sessions are reasonably available. Free intro training sessions and longer training courses usually offer CPE credits as well as access to expert opinion.

Bob Scarborough

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

Besides revenue recognition, you may be face with capitalized software for sale or internal use. If for sale, capitalization starts after technological feasibility (beta). If you have little time between beta and release, you may not capitalize anything. If for internal use (i.e. SaaS), capitalization starts with development (after determining requirements). If for sale and internal use, the for sale rules are generally applied. The main point here is that capitalization of software may more likely be required if for internal (SaaS) use.

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

These comments are all 2013. With the new Rev Rec 605, would you/could you re-examine your answers and see if they are still accurate?

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

And adding to Wayne's note, there is a Proformative webinar this week on this topic, why not register for it and learn even more?
See https://www.proformative.com/events/new-world-revenue-recognition-accounting-only-tip-iceberg

Topic Expert
Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

There are many people offering free overviews - including my company. The online documentation at some of the big four is excellent - including the scenarios by industry (industry specific impact of the new revenue standard) that are being published.

While some of the changes in this new revenue standard subtle - there will be a significant impact on revenue recognition for many companies.

Bob Scarborough

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