As a result, this changing nature of the SaaS model may make it more difficult to apply sales recognition guides to The Codification Topic 606, Revenue from Contracts with Customers (ASC 606) accounting standards. Under ASC 606, a SaaS provider recognizes revenue when it transfers service to the customer. The amount of revenue recorded is based on the consideration expected by the SaaS provider in exchange for these services. What is accounting right now? Let`s take the same example in case 2, but instead of an implementation service, the $2000 bill is an installation fee. These can now be treated in practice of a few different types, but it is common for installation costs to be recognized prudently over the life of a customer. Say that the client`s lifespan is four years. After one month, we will record 1,042 USD in revenue (12,000 USD / 12 months for the subscription and 2,000 USD / 48 months – 42 USD for the installation fee). Since we charged $3,000 for the subscription and advance fees, we will have recorded $1,958 in latent revenue for the money we received but have not yet earned. For example, we sell a three-year subscription to a customer for an annual fee of $10,000, $12,000 and $14,000. Otherwise, the revenue would also be covered by the contract ($12,000 per year over three years). However, the existence of potential revenue limits your turnover for year 1 to the $10,000 earned contractually. The remaining $2,000 in potential revenue is not accounted for under current accounting principles. What changes under ASC 606? There is an additional criterion for a “stand-alone delivery device” that must be considered a “separate POB” according to CSA 606: the POB must be different from other POBs made available to the customer.
A common example of this concept is the construction of a house. When building a home, many of the individual rooms you can find below in the local DIY store (i.e. have standalone value): nails, color, sink and many other things. However, according to CSA 606, goods and services are no different from other contract commitments, because the overall promise is to transfer a combined object, the home. The maturation of the SaaS delivery model also meets its business model to meet customer requirements and maintain profitability. For example, a typical scenario for a growing SaaS provider is to offer customers an extensive service offering in advance that includes individualized professional services and other customized solutions to better understand customer needs. Finally, SaaS providers can standardize these offerings and reduce the level of individual professional services provided by themselves or by dedicated partners. Under the current management, we have the same accounting as Case 2 above. We list two delivery elements with stand-alone value, a subscription and an implementation service.
At the end of the first month, we have potential revenues of $US 3,733 and only $3,000 has been earned contractually. That`s why we have $3,000 in revenue with $733 $US of potential unaccounted for revenue. What changes under ASC 606? Within CSA 606, we have a turnover of $12,000 in the first year, as the cap on potential revenues no longer applies: $10,000 in cash and contract assets of $2,000. A contractual value is essentially money that we have earned but that we do not yet have the right to bill. It is the opposite of a contractual liability (formerly known as latent income) which is money we have received but has not yet earned. In this example, we generated revenues of $2,000, but we are not contractually entitled to charge for these services until later.