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How is Revenue Recognized For A SaaS Company?

saas revenue recognition rulesHow is revenue recognized for a SasS company?  I understand there are many variations for SaaS so some general assumptions may need to be made to provide an answer.

Answers

(Agent, JKS Solutions, Inc.) |

One of the challenges with any online forum is the give and take during an interview or conversation cannot be captured fully in order to point you in the correct direction.

I'm going to take a stab that you have multiple elements associated with your customer contracts. For each multiple element you are required to determine the portion of revenue associated with it based on a myriad of factors.

In addition this is a developing area of emerging issues with recent pronouncements so many areas of guidance need to be reviewed to land on the correct treatment.

To give you an idea of the complexity of your question:

BDO June 2010 Slides
http://www.bdo.com/acsense/events/eventdocuments/Acsense%202010%20SaaS%20Revenue%20Recognition%20Participants.pdf

PwC June 2010 Slides
http://www.pwc.com/us/en/technology/assets/software-revenue-recognition-gaap.pdf

SAAS Blog Post Aug 2010
http://blog.openviewpartners.com/saas-revenue-recognition-rules-boy-this-stuff-is-different/

I do not recommend or endorse these presentations, I simply Googled your topic and plopped the links here. You will need to seek professional consulting advice from a firm that specializes in revenue recognition and one that has past experience and current knowledge of SAAS companies.

Best.

Anonymous
(CFO) |

Thanks Valerie. I suspected that this was too complex a question for the forum but I tried anyway. The links you provided were enough to get me what I was looking for. Thank you.

(Agent, JKS Solutions, Inc.) |

I'm glad that I was able to be of some help. Happy Thanksgiving.

(Agent, JKS Solutions, Inc.) |

I posted a link to this discussion in the Revenue Recognition Group on Linkedin, maybe someone will drop by and provide some more details for you.

Anonymous
(Controller) |

Assuming the customer does not have the contractual ability to take possession of the software and it is not logistically possible to do so, then you account for the transaction as a service arrangement. Professional services need to be evaluated to determine if they have standalone value. Implementation services generally do not, and must be recognized over the estimated life of the customer relationship (this is not the same as the contract term). Services that do have standalone value can be recognized discretely. The actual subscription and transactions fees are recognized as earned, however pricing paradigms can be complex and therefore careful attention needs to be paid to contract minimums/maximums and tiered pricing to ensure that you are not front loading revenue or recording contingent revenue. Reading the literature and also consulting the footnotes and Critical Accounting Policies for SAAS companies like Salesforce.com, Netsuite, and Concur should help you understand how others do it.

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

I agree, although with EITF 08-1 it's now more standard to be able to separate the implementation services and recognize them as they are performed rather than having to spread over the life of the arrangement. Standalone value just means another vendor could possibly do those services (whether they actually have or not). Check filings for SuccessFactors.

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

This is the footnote from a SaaS company where I was CFO. In line with the post above. Good luck.

The Company primarily derives revenue on a recurring basis as a SaaS provider. The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 985‐605 (formerly Emerging Issues Task Force (“EITF”) Issue No. 00‐03, Application of AICPA Statement of Position 97­2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware). Under ASC 985‐605, a software element is only present in a hosting arrangement if the customer has a contractual right to take possession of the software at any time during the hosting arrangement without significant penalty, and if it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. As the customer is not given this option, the arrangement is recognized as a service contract. The Company provides its customers with hosted access to certain software applications for a fixed monthly or annual fee. Revenue is billed and recognized ratably on a monthly basis over the term of the related subscription agreement.

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