This document summarizes the key findings from a survey of 70 publicly traded SaaS companies regarding their revenue recognition practices for setup fees and implementation services. The survey found two main trends: 1) More companies are recognizing non-subscription revenues immediately by determining the services have standalone value. 2) When revenues are deferred, more companies are recognizing them over the estimated customer relationship period rather than the contractual term. The document discusses the accounting guidelines and how companies have shifted practices over time in responding to changes in those rules and the business environment.
Upcoming changes in lease accounting standards: How technology can help with ...Nakisa Financials
The way organizations have always managed their leases is about to change. Soon, they will need to start complying with the new accounting standards for lease accounting and reporting from regulations under US GAAP and IFRS, as proposed by the FASB/IASB.
With high volumes of complex lease contracts, industries such as telecom, oil & gas, cargo & transportation and construction are some of the most affected industries by the proposed lease accounting standards. For a smooth transition to the new accounting regulations, early preparation is not only recommended, but crucial for successful compliance and costs savings. Operators will need to change their financial reporting processes and systems now to ensure their business could function uninterrupted and in compliance with the new requirements.
In this presentation find out:
- The steps required to prepare for the upcoming regulatory changes and the time/cost benefits that can be gained by preparing today.
- The benefits of optimizing not only your leasing accounting processes, but also transactional processes.
- How you can gain visibility into your lease exposure with SAP® Lease Administration by Nakisa®, enabling you to optimize and support accounting processes for more efficient cost controlling and regulatory compliance.
All entities that have contracts with customers will be affected by the new revenue recognition standard, including not-for-profit organizations.
The Financial Accounting Standards Board (FASB)'s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) creates a five-step revenue recognition model that replaces a rules-based approach with a principles-based approach. The changes are wide-ranging and will have more of an impact on commercial entities than the nonprofit sector, and not-for-profit organizations will have some exceptions to following the new standard. Contributions, for example, are scoped out of the changes. Nevertheless, other provisions of the new guidance could be of interest and should be considered carefully.
Read this SAP Thought Leadership Paper to understand what new changes in regulations mean for your business and how you can become smarter about revenue recognition and lease accounting with SAP Lease Administration by Nakisa, a solution extension from SAP.
On June 21, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions received and Contributions Made, which provides accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations and business enterprises.
With a fundamental shift in the CFO mission, the finance function has become a critical change agent across organizations. The role of financial leaders such as CFOs is evolving, from a traditional financial controller, to one that drives performance improvements across the organization.
Upcoming changes in lease accounting standards: How technology can help with ...Nakisa Financials
The way organizations have always managed their leases is about to change. Soon, they will need to start complying with the new accounting standards for lease accounting and reporting from regulations under US GAAP and IFRS, as proposed by the FASB/IASB.
With high volumes of complex lease contracts, industries such as telecom, oil & gas, cargo & transportation and construction are some of the most affected industries by the proposed lease accounting standards. For a smooth transition to the new accounting regulations, early preparation is not only recommended, but crucial for successful compliance and costs savings. Operators will need to change their financial reporting processes and systems now to ensure their business could function uninterrupted and in compliance with the new requirements.
In this presentation find out:
- The steps required to prepare for the upcoming regulatory changes and the time/cost benefits that can be gained by preparing today.
- The benefits of optimizing not only your leasing accounting processes, but also transactional processes.
- How you can gain visibility into your lease exposure with SAP® Lease Administration by Nakisa®, enabling you to optimize and support accounting processes for more efficient cost controlling and regulatory compliance.
All entities that have contracts with customers will be affected by the new revenue recognition standard, including not-for-profit organizations.
The Financial Accounting Standards Board (FASB)'s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) creates a five-step revenue recognition model that replaces a rules-based approach with a principles-based approach. The changes are wide-ranging and will have more of an impact on commercial entities than the nonprofit sector, and not-for-profit organizations will have some exceptions to following the new standard. Contributions, for example, are scoped out of the changes. Nevertheless, other provisions of the new guidance could be of interest and should be considered carefully.
Read this SAP Thought Leadership Paper to understand what new changes in regulations mean for your business and how you can become smarter about revenue recognition and lease accounting with SAP Lease Administration by Nakisa, a solution extension from SAP.
On June 21, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions received and Contributions Made, which provides accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations and business enterprises.
With a fundamental shift in the CFO mission, the finance function has become a critical change agent across organizations. The role of financial leaders such as CFOs is evolving, from a traditional financial controller, to one that drives performance improvements across the organization.
Software Define Network, a new security paradigm ?Jean-Marc ANDRE
How SDN works, what is openflow, how sdn will change the way you design a network? Is SDN a secure place ? In this slideshow we do a compilation of sources and explain what is SDN reality.
Encoding Text About Things (Georg Vogeler)Georg Vogeler
Presentation at the TEI Conference 2016, Vienna, see Abstract (https://www.conftool.net/tei2016/index.php?page=browseSessions&form_session=16&presentations=show) dealing with RDFa, RDF reification and of course TEI.
En esta segunda parte aprenderás conceptos generales del neurodesarrollo después del nacimiento. Como se produce el crecimiento cerebral y como el ambiente influye en el desarrollo individual.
Enfermedades en niños en pueblos marginados.Deny Fosado
Posibles causas de las enfermedades mas comunes en los niños de pueblos marginados, su posible relación con los hábitos de alimentación e higiene, asi como con la relación padre e hijo.
Cognitive Imitation in 2-Year Old Children (Homo sapiens): A comparison with...Francys Subiaul
Here we compare the performance of two-year old human children with that of adult rhesus macaques on a cognitive imitation task. The task was to respond, in a particular order, to arbitrary sets of photographs that were presented simultaneously on a touch sensitive video monitor. Because the spatial position of list items was varied from trial to trial, subjects could not learn this task as a series of specific motor responses. On some lists, subjects with no knowledge of the ordinal position of the list items were given the opportunity to learn the order of those items by observing an expert model. Children, like monkeys, learned new lists more rapidly in a social condition where they had the opportunity to observe an experienced model perform the list in question, than under a baseline condition in which they had to learn new lists entirely by trial and error. No differences were observed between the accuracy of each species’ responses to individual items or in the frequencies with which they made different types of errors. These results provide clear evidence that monkeys and humans share the ability to imitate novel cognitive rules (cognitive imitation).
What makes the human mind different from the minds of other animals? Here, the cognitive abilities of human and non-human primates are compared and contrasted in three general domains (a) self-awareness, (b) social cognition, and (c) physical cognition. Our analysis of the data is framed in terms of an overarching theory of human cognitive specialization. We postulate that many aspects of the human and the non-human primate mind are remarkably conserved. As a result, human and non-human primates share many cognitive and behavioral capabilities. However, we will argue that despite the many similarities between the human and non-human mind, one fundamental feature of our species’ psychology is its ability to interpret observable variables in terms of unobservable (causal) forces. Consequently, while animals can develop rules premised on observable causes, humans can reason about both observable and unobservable causes, resulting in the kind of cognitive and behavioral flexibility that characterizes our species.
SaaS Revenue Recognition Principles: How a SaaS Company Should Treat Setu...Armanino LLP
In 2010, when the new revenue standards1 were issued by the FASB, Armanino McKenna surveyed the early adopting public SaaS companies to see if implementation/setup fees were being recognized as delivered, rather than deferred, as allowed under the new rules.
Revenue Recognition Considerations for SaaS CompaniesMatt Ream
The new Revenue Recognition Standard has finally been issued, and now the real work begins. The new guidance standardizes how companies should recognize revenue under U.S. GAAP and IFRS, but many questions remain. In this session we will discuss the new standard and provide practical examples for implementing and automating revenue recognition specifically for SaaS companies. Including: SaaS offerings, allocations, multiple element arrangement, VSOE, performance obligations (POBs) and implementation factors to consider.
Jagan Reddy and Vibhor Chandra gave this presentation at Zuora’s Subscribed 2016 event in San Francisco earlier this month. It was a great session, very well received by those in attendance. We hope you find it helpful.
Watch the full webinar and get the complete deck at: https://goo.gl/Zg1SO1
What every tech company needs to know to prepare for the new revenue accounting standards. The new revenue recognition standard ASC 606 represents the most widespread change to revenue recognition rules in recent years. The transition from a rules-based approach for rev rec to a principle-based approach has significant implications for the entire organization. Software and other high tech companies must ready themselves for numerous impacts across systems, processes and policies as they work toward compliance.
Saas Business Model: Unlocking Infinite Business PossibilitiesFredReynolds2
The Software-as-a-Service (Saas) industry emerged in 2005 and has since witnessed remarkable growth. Substantial investments are now being made in Saas business model startups, which have a promising chance of success if they meet market demands. This sector is experiencing exponential expansion as more time and money flow into it.
Software Define Network, a new security paradigm ?Jean-Marc ANDRE
How SDN works, what is openflow, how sdn will change the way you design a network? Is SDN a secure place ? In this slideshow we do a compilation of sources and explain what is SDN reality.
Encoding Text About Things (Georg Vogeler)Georg Vogeler
Presentation at the TEI Conference 2016, Vienna, see Abstract (https://www.conftool.net/tei2016/index.php?page=browseSessions&form_session=16&presentations=show) dealing with RDFa, RDF reification and of course TEI.
En esta segunda parte aprenderás conceptos generales del neurodesarrollo después del nacimiento. Como se produce el crecimiento cerebral y como el ambiente influye en el desarrollo individual.
Enfermedades en niños en pueblos marginados.Deny Fosado
Posibles causas de las enfermedades mas comunes en los niños de pueblos marginados, su posible relación con los hábitos de alimentación e higiene, asi como con la relación padre e hijo.
Cognitive Imitation in 2-Year Old Children (Homo sapiens): A comparison with...Francys Subiaul
Here we compare the performance of two-year old human children with that of adult rhesus macaques on a cognitive imitation task. The task was to respond, in a particular order, to arbitrary sets of photographs that were presented simultaneously on a touch sensitive video monitor. Because the spatial position of list items was varied from trial to trial, subjects could not learn this task as a series of specific motor responses. On some lists, subjects with no knowledge of the ordinal position of the list items were given the opportunity to learn the order of those items by observing an expert model. Children, like monkeys, learned new lists more rapidly in a social condition where they had the opportunity to observe an experienced model perform the list in question, than under a baseline condition in which they had to learn new lists entirely by trial and error. No differences were observed between the accuracy of each species’ responses to individual items or in the frequencies with which they made different types of errors. These results provide clear evidence that monkeys and humans share the ability to imitate novel cognitive rules (cognitive imitation).
What makes the human mind different from the minds of other animals? Here, the cognitive abilities of human and non-human primates are compared and contrasted in three general domains (a) self-awareness, (b) social cognition, and (c) physical cognition. Our analysis of the data is framed in terms of an overarching theory of human cognitive specialization. We postulate that many aspects of the human and the non-human primate mind are remarkably conserved. As a result, human and non-human primates share many cognitive and behavioral capabilities. However, we will argue that despite the many similarities between the human and non-human mind, one fundamental feature of our species’ psychology is its ability to interpret observable variables in terms of unobservable (causal) forces. Consequently, while animals can develop rules premised on observable causes, humans can reason about both observable and unobservable causes, resulting in the kind of cognitive and behavioral flexibility that characterizes our species.
SaaS Revenue Recognition Principles: How a SaaS Company Should Treat Setu...Armanino LLP
In 2010, when the new revenue standards1 were issued by the FASB, Armanino McKenna surveyed the early adopting public SaaS companies to see if implementation/setup fees were being recognized as delivered, rather than deferred, as allowed under the new rules.
Revenue Recognition Considerations for SaaS CompaniesMatt Ream
The new Revenue Recognition Standard has finally been issued, and now the real work begins. The new guidance standardizes how companies should recognize revenue under U.S. GAAP and IFRS, but many questions remain. In this session we will discuss the new standard and provide practical examples for implementing and automating revenue recognition specifically for SaaS companies. Including: SaaS offerings, allocations, multiple element arrangement, VSOE, performance obligations (POBs) and implementation factors to consider.
Jagan Reddy and Vibhor Chandra gave this presentation at Zuora’s Subscribed 2016 event in San Francisco earlier this month. It was a great session, very well received by those in attendance. We hope you find it helpful.
Watch the full webinar and get the complete deck at: https://goo.gl/Zg1SO1
What every tech company needs to know to prepare for the new revenue accounting standards. The new revenue recognition standard ASC 606 represents the most widespread change to revenue recognition rules in recent years. The transition from a rules-based approach for rev rec to a principle-based approach has significant implications for the entire organization. Software and other high tech companies must ready themselves for numerous impacts across systems, processes and policies as they work toward compliance.
Saas Business Model: Unlocking Infinite Business PossibilitiesFredReynolds2
The Software-as-a-Service (Saas) industry emerged in 2005 and has since witnessed remarkable growth. Substantial investments are now being made in Saas business model startups, which have a promising chance of success if they meet market demands. This sector is experiencing exponential expansion as more time and money flow into it.
At Totango, we’ve developed a framework – the Customer Retention Cost (CRC) and the CRC Ratio – to assess and benchmark customer retention efforts in the industry. This is a critical missing component in the portfolio of metrics that SaaS executives, Boards, and investors should track and measure.
How Distributors Increase Income with Automated Rebates and ChargebacksSAP Solution Extensions
For more information around SAP Incentive Administration by Vistex please visit http://www54.sap.com/lob/sales/software/incentive-administration/index.html
and for SAP Paybacks and Chargebacks by Vistex please visit http://www54.sap.com/lob/sales/software/paybacks-chargebacks/index.html
Find out how smart retailers are recouping monies due through chargebacks, rebates, and other incentive programs – with auditors – using solution extensions from SAP. The SAP Incentive Administration and SAP Paybacks and Chargebacks applications help automate and streamline the complex processes involved.
Subscription management and recurring billing apps can be a bit overwhelming in regards to what it all means.
In order to save you the confusion, we have created a beginner’s guide to subscriptions, payment gateways and merchant accounts.
Solution brief: New Revenue Recognition and Lease Accounting Standards: Compl...Nakisa Financials
With new regulatory changes already approved for revenue recognition, and other changes being finalized for lease accounting, smart companies are modifying processes and systems today to ensure compliance and uninterrupted operations tomorrow. Is your company moving forward? The SAP® Lease Administration application by Nakisa can help.
Subscribed 2019 - Deliver Growth Without Breaking Your Back OfficeZuora, Inc.
Is the shift to subscriptions wreaking havoc on your RevRec process? Learn how RevRec automation can help support business growth and agility by seamlessly handling complex long-term contracts and frequent contract modifications without breaking your back office.
The third quarter was all about hedging and complex financial instruments. Two accounting standards updates will simplify accounting for entities and the users of their financial statements.
Low-interest rates mean that P&C leadership teams are facing increasing pressure to generate heftier margins from their underwriting operations. More at http://gt-us.co/1japuAu
Similar to saas-revenue-recognition-principles-how-to-treat-setup-and-implementation-fees(with-survey) (20)
1. SaaS REVENUE
RECOGNITION PRINCIPLES
HOW TO TREAT SETUP AND IMPLEMENTATION FEES
AN ARMANINO WHITE PAPER / authored by Matthew Perreault / coauthored by Michael Boulton
2. Our survey of 70 publicly traded SaaS companies includes excerpts from each company’s revenue recogni-
tion accounting policy footnote, and their policy for recognizing non-subscription service revenues. The survey
demonstrates the disparity in practice as well as trends in the revenue recognition models used by SaaS
companies. You can use this information as a tool to gauge the accuracy, transparency and completeness of
your own revenue recognition policies and disclosures. Attached at the end of this white paper is a complete
copy of the SaaS Revenue Recognition Survey.
3. Our SaaS survey analyzes these changing prac-
tices and offers insights that can help you evaluate
your company’s revenue recognition policies and
disclosures.
In 2009, the release of Accounting Standard Update
(ASU) 2009-131
relaxed the revenue recognition
rules for “multiple element” arrangements, including
SaaS subscription and non-subscription services
(e.g., setup and implementation up-front fees, other
services and products),moving SaaS companies
away from the restrictive and complex software
revenue rules created under SOP 97-2. giving them
more flexibility in the way they recognize revenues
– especially the non-subscription fees.
To determine how SaaS companies have changed
revenue recognition practices under ASU 2009-13,
we surveyed information provided by public SaaS
companies between 2012 and 2014.
The results were compelling, and we discovered
two trends: a shift in the way SaaS companies
treat non-subscription revenue and a shift in the
recognition period used for these non-subscription
revenues.
Revenue recognition can be a tricky issue, even for
SaaS companies with traditionally simplistic recur-
ring revenue streams. As SaaS business models
and GAAP revenue rules have evolved, companies
have adapted their revenue recognition practices.
1
ASU No. 2009-13. “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force”
4. TREND 1 - A SHIFT IN REVENUE
TREATMENT
Our 2012 survey focused on how SaaS companies
treated the non-subscription portion of revenues. We
reviewed 47 companies and found that 25 (or 53%)
deferred fees related to non-subscription services.
In 2014 we updated the survey and reviewed 70
companies. We found that only 28 companies (or
40%) deferred non-subscription revenues—a clear
decline.
Why the shift in revenue treatment with no changes
in accounting rules between early 2012 and early
2014? We examined footnote disclosures and
deduced that more companies were determining
that ancillary services and products had stand-alone
value.
The rules say that stand-alone value exists “if the
services/deliverables could be sold separately by
another vendor, or if the customer could resell the
services/deliverables on a stand-alone basis.”2
The
rules further state that there does not have to be an
observable market for the item(s) to support stand-
alone value, and stand-alone value can be derived
from “any competitor’s largely interchangeable
products or services in standalone sales to similarly
situated customers.”
53%2012
2014
Companies Deferring Non-
Subscription Revenues
40%
2
Prior to ASU 2009-13, a vendor could only use certain types of evidence when determining the fair market value of deliverables.
5. The market now widely accepts SaaS/Cloud soft-
ware solutions for virtually all applications, with
open-source code/APIs and an ever-increasing
number of providers who can install, configure and
integrate these solutions. As a result, more SaaS
companies can confidently state that these non-
subscription services meet the GAAP definition of
having stand-alone value.
The accounting policy of Workday Inc., a Cloud-
based ERP provider with a quickly growing cus-
tomer base and $468M in revenues in 2013, clearly
illustrates this trend:
In determining whether professional services can be
accounted for separately from subscription services,
we consider the availability of the professional ser-
vices from other vendors, the nature of our profes-
sional services and whether we sell our applications
to new customers without professional services. In
fiscal 2013, we determined that we had established
standalone value for the deployment services re-
lated to our financial management application. This
was primarily due to the growing number of partners
that were trained and certified to perform these
deployment services, the successful completion of
a significant deployment engagement by a firm in
our professional services ecosystem and the sale
of several financial management cloud application
subscription arrangements to customers without our
deployment services.3
However, not all SaaS companies immediately rec-
ognize revenue for these non-subscription services,
due to conflicting messaging from the SEC. The
SEC warns SaaS companies against recogniz-
ing fees for services in circumstances when “the
customer would ascribe a significantly lower, and
perhaps no, value to elements ostensibly associated
with the up-front fee in the absence of the regis-
trant’s performance of other contract elements.” 4
By analogy, such fees are similar to the upfront fee
paid to join a gym—the value of this upfront fee (i.e.,
lower monthly fees in the future) is provided to the
customer over a period of time.
It makes intuitive sense that most SaaS customers
find little value in the up-front services without the
ongoing software subscription. As a result, some
SaaS companies conclude that deferring such non-
subscription services is appropriate.
Benefitfocus, a SaaS provider with $105 million in
revenues in 2013, concluded that it needed to defer
non-subscription revenues: “The Company’s profes-
sional services are not sold separately from the
software services and there is no alternative use for
them. As such, the Company has determined that
the professional services do not have standalone
value.”5
The loosely written revenue rules seem to allow
companies to utilize differing accounting practices
for recognizing non-subscription service revenues.
Although it creates an apparent disparity in practice,
an increasing number of SaaS companies are con-
cluding that such services have stand-alone value
and are choosing to recognize revenue immediately.
3
Workday, Inc. form 10-K for the year ended January 31, 2013
4
SAB TOPIC 13A, Paragraph 3f, Q1 Q Response, Sequence 171
5
Benefitfocus, Inc. form 10-K for the year ended December 31, 2013
6. 4
ASC 605-10-S99, A3f, Question 1; SAB Topic 13A Paragraph 3f, Question 1
TREND 2 - A SHIFT IN
RECOGNITION PERIOD
The GAAP rule governing the topic for SEC regis-
trants states: The period over which the deferred
upfront fee should be recognized should extend be-
yond the initial contractual period if the relationship
with the customer is expected to extend beyond the
initial term and the customer continues to benefit
from the payment. In addition, customers may pay
a higher upfront fee for additional services, custom
features, or functionality. Upon renewal, the custom-
ers would continue to benefit from these incremen-
tal services, features, or functionality. Therefore, it
would be appropriate to recognize the upfront fees
over the expected customer relationship term rather
than the initial term.6
As illustrated, 64% (18 of the 28 companies who dis-
closed the amortization period) of SaaS companies
deferring the non-subscription revenues in our 2014
survey, elected to recognize such revenues over the
estimated customer relationship period rather than
the contractual life (i.e. subscription term). Those few
who did recognize the non-subscription revenues
over the contractual life likely viewed such services
as (1) being directly connected to a specific contract
or project, and (2) not benefitting the customer after
the expiration of the initial contract.
As this graph illustrates, this shift in practice over
the last three years was not significant but does
confirm that SaaS industry practice is migrating to
the view that customer relationship is the appropri-
ate recognition period. Customers buying these
services are making an investment they hope lasts
beyond the initial SaaS subscription period. SaaS
companies understand that customer renewals
equate to long-term customer relationships, and
they are increasingly matching the revenue with the
duration of these relationships.
2012
Estimated Customer
Relationship
Contractual
Life
2014 64%
60% 40%
36%
Deferred Non-Subscription Revenue:
Estimated Customer Relationship
Period vs. Contract Period
What is the appropriate recognition period for the
non-subscription revenues that do get deferred?
7. LOOKING
FORWARD
Overall, SaaS companies now seem to better under-
stand and apply the multiple element revenue recog-
nition rules, modified in 2009, likely because of SEC
comment letters and the advice they’ve received from
their auditors. However, the ever-evolving nature of
SaaS business models require finance executives and
their teams to keep their eyes on the revenue ball and
continually revisit how their company recognizes sub-
scription and non-subscription revenues.
The new (joint FASB and IASB) revenue standard
(effective for public companies in 2017 and private
companies in 2018), is set to replace all SaaS revenue
guidance, but the new standard doesn’t specifically
address upfront fees, and the SEC hasn’t indicated if it
will amend or retract its guidance on this topic, so at the
moment it is unclear how practice will change when the
new rules take effect.
8. amllp.com
Armanino provides an integrated set of accounting
services — audit, tax, consulting and technology so-
lutions — to a wide range of organizations operating
both in the US and globally.
You can count on Armanino to think strategically,
to provide the sound insights that lead to positive
action. We address not just your compliance issues,
but your underlying business challenges, as well —
assessing opportunities, weighing risks, and explor-
ing the practical implications of both your short- and
long-term decisions.
When you work with us, we give you options that
are fully aligned with your business strategy. If you
need to do more with less, we will implement the
technology to automate your business processes. If
it’s financial, we can show you proven benchmarks
and best practices that can add value company-
wide. If the issue is operational, we’ll consult with
your people about workflow efficiencies. If it’s
compliance, we’ll ensure you meet the requirements
and proactively plan to take full advantage of the
changes at hand. At every stage in your company’s
lifecycle, we’ll help you find the right balance of
people, processes and technology.
For further information regarding revenue recognition,
contact one of our SaaS expert partners:
Mathew Perreault, CPA
Partner, ArmaninoLLP
matthew.perreault@amllp.com
925 790 2755
Michael Boulton, CPA
Senior Manager, ArmaninoLLP
michael.boulton@amllp.com
408 200 6458
STRATEGIC INSIGHTS
PRACTICAL ACTION