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Subscription revenue recognition for monthly service over non-equal length months

We are in the process of launching a subscription product where users will pay for access to content online (e.g. HBO). Users could subscribe on any day of the month and down the road they may cancel on any day of the month. So, how should we recognize revenue for this? Based on days of the month? The beginning and end periods would thus have partial months based on the days subscribed in that month? What do you do with longer and shorter months, January (31) vs. February (28)? And what if people subscribe in January on the 28th, and then cancel on Feb 3rd and we refund them 100%? Do we need to set up a reserve for intra-month cancellations? There seem to be a lot of "corner cases" for revenue of this type and I would appreciate any insights from folks dealing with this already.

Answers

Ken Stumder
Title: Finance Director / Controller
Company: Ken Stumder, CPA
(Finance Director / Controller, Ken Stumder, CPA) |

Hi Mark,

You would prorate the revenue based on the days (primarily for the first and last months as you noted).

If subscribers can sign up on the 28th and cancel on the 3rd, you might establish an internal policy which defines a trial period and recognize no revenue at all, and then once the customer is active / using the service beyond x number of days start taking the revenue. I wouldn't get too deep into reserving for this sub-population (i.e. quick cancels), especially with a new product offering where you haven't got a whole lot of historical data to draw upon and will spend the first few months/year analyzing customer behavior and traction on the product. Once you have a cash history to rely on, you'll lock in the best reserve methodology for those paying customers that can operate under a cancel at anytime basis.

Interested in what others do myself.

Ken

Daniel Berube
Title: Controller
Company: Tensoft, Inc
(Controller, Tensoft, Inc) |

Hi Mark,

We sell subscriptions and we recognize by day. In our case this is helpful as our policy on a cancellation is a prorated model, so having the information by day helps. This also eliminates the need for me to have a reserve for cancelled accounts, as at month end if the user is active they are charged. In your case, given you return 100% of the amount upon cancellation, you would need a reserve based on your historical information.

The day calculation does create an uneven revenue stream due to the difference in days from one month to the other. This isn't a serious concern for us and our software package does a good job on the revenue reporting so we understand any changes in revenue, regardless of the cause.

Dan

Kathleen Thompson
Title: VP, Finance
Company: Retail Pro
(VP, Finance, Retail Pro) |

Daniel,
What SW package do you use? We are looking to move into a subscription-based billing model and our current system is not equipped to handle this.

Kathleen

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

I like the idea of prorating on a daily basis throughout the entire term. That said, we have NetSuite setup to prorate only on the first and last month. The months in between are straight-line. In this way, February (for example) revenue is not abnormally low relative to other months.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

Look at how your contracts are written and use that to determine recognition. Most contracts denote billing in monthly terms in which case 1/12 of annual revenue happens each month. If you have a start or end date for service in the middle of the month, prorate. NetSuite has a good revenue recognition and deferred revenue model that makes this easy.

Ben Murray
Title: Vice President and CFO
Company: Cartegraph
(Vice President and CFO, Cartegraph) |

If you are going this route, I would seriously look at rev rec software if your GL system cannot handle subscription revenue. We have software subscriptions and we prorate based on days. I think this is a bit too much and will average out if you have a lot of customers. At another software company, we used the mid-month convention which was fine by our auditors. If the customer signs up at any time during the month, we take half of the revenue in that month and the last half in the 13th month. However, I had to track this in spreadsheets so mid-month was better than by day.

If you have a product like NetSuite, then you can choose your level of rev rec detail. If you don't, I would not got by day or you are going to have one nasty rev rec spreadsheet.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Intaact will handle it as well. You're allowed to do it monthly, prorate half a month, etc, so long as there is no material impact (think "old days before this was easy"). That being said, most modern systems will do this for you now.

Topic Expert
Joan Varrone
Title: CFO
Company: Cloud Cruiser
LinkedIn Profile
(CFO, Cloud Cruiser) |

Unless you have some kind of software to manage this I would just do monthly and not overly complicate things. If you have many customers it would probably even out in any event. Auditors are more interested in annual results and not monthly in any event.

Rahul Mohta
Title: Independant Advisor for Microsoft Dynami..
Company: Real Dynamics
LinkedIn Profile
(Independant Advisor for Microsoft Dynamics AX, Real Dynamics) |

To manage subscription revenue recognition and overall performance, you can evaluate New Microsoft Dynamics AX which has solid capabilities in this area.
Regards
Rahul Mohta

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