After almost five years of talking about it, the long-anticipated revenue recognition standard is now being employed by the public filers. Private companies still have some time, but don’t procrastinate. There is a lot you need to do in 2018 to be able to apply the standard and the full or modified retrospective application.
How to recognize revenue:
- Identify the contract with the customer
- Identify the performance obligation
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize the revenue as the performance obligations are satisfied
Sounds easy enough, but there are some complexities that need to be analyzed for all the SaaS companies out there.
For most subscription-based organizations, the performance obligations will be a month’s worth of service or access. SaaS companies typically only have one performance obligation and the revenue should be recognized during the month the service or access is delivered.
The transaction price is typically well defined, but make sure you study up on variable consideration and the impacts it will have on revenue recognition (rebates, volume discounts, etc.). Variable consideration for subscriptions that have tier-based pricing will introduce the biggest change from the historical GAAP application.
Lastly, don’t forget the ramifications the new standard has on sales commissions. Sales commissions under the new standard should be capitalized and amortized over the term of the contract.
Not earth-shattering changes for SaaS companies, but contracts need to be analyzed and processes and controls need to be established to assure compliance. The new guidance is touted as the biggest change to U.S. GAAP since the Sarbanes Oxley Act of 2002, and you won’t want to be behind this eight ball.
For a detailed dive into the new revenue recognition standard – including detailed guidance for software and technology companies – download our e-Book.
Steve Pope, CPA