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SaaS Revenue Recognition for Distributors

Accounting  Professional's Profile

The company I work for distributes software licenses (perpetual) and is starting to also offer cloud-based offerings as more and more software "manufacturers" are switching to that model. So to clarify, we sell a cloud-based SaaS subscriptions for software applications customers access to the application (whether through a portal, i.e. thin client, or to be installed locally), but we are merely the distributor. As such, we are struggling with the question as to whether we need to record these sales on a gross or net basis in the income statement under ASC 605-45, Principal and Agent Considerations. The main criteria we are unclear to is whether we are the "primary obligor" because the customer will typically come to us (the distributor) with questions and issues, but they can also go to the software manufacturer directly, and in some cases we contact the manufacturer and get the questions/issues resolved and pass the information onto the customer. Our auditors are mulling this over and have not provided much guidance. Anyone have a rationale either way to present these types of sales on a gross or net basis, as the distributor of SaaS products?

Answers

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

Brian: as stated at 605-45-45-4, "whether a supplier or an entity is responsible for providing the product or service desired by the customer is a strong indicator of the entity's role in the transaction."
In a SaaS arrangement, the vendor provides hosted access to software applications - the service desired by the customer is the ability to use those applications. In determining the primary obligor, you should therefore be asking questions relating to the provision of the service such as:
Who is primarily responsible for the performance of the software, including bug fixes, new features/enhancements, etc. This would typically be the "manufacturer."
Who is primarily responsible for the hosting arrangements? Again, typically the manufacturer (although frequently contracted out to one or more third-party data centers).
You mention that, for technical support, the customer can either go directly to the manufacturer or can go through your company to get the answer from the manufacturer. Unless your distribution agreement places specific responsibilities on you to resolve customer issues, as opposed to referring issues to the manufacturer for resolution, I don't see this activity as a significant indicator that you could be considered the primary obligor.

Accounting Professional
Title: VP of Accounting
Company: Anonymous
(VP of Accounting , Anonymous) |

Thanks for the insightful thoughts Stephen. This helps immensely!

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