Updated January 2021
Since the release of the new revenue recognition standards, many software subscription businesses still don’t understand their implications for their financial reporting.
ASC Topic 606 or IFRS 15 aims to clarify the standards around recognizing revenue and cost guidance for SaaS businesses. It is a major change, and non-public entities are required to apply the revenue recognition standard for annual reporting periods starting in fiscal years beginning after 12/15/18.
Developed by the Financial Accounting Standard Board (FASB), The general idea of the new code is to identify performance obligations and allocate revenue by transactions as they are fulfilled. Sounds simple, right?
Key aspects to be aware of include:
Setup Fees – will they be recognized proportionate to the revenue recognized under the contract rather than over the customer life. This will typically speed up revenue recognition for SaaS companies.
Licenses – A company must decide whether it is providing a software license as a separate performance obligation, distinct from the hosting services, or a service wherein the license and hosting services together constitute a single performance obligation.
Implementation – Whether the implementation services should be treated as a separate performance obligation.
Premium Support or Consulting – whether both the premium support and consulting services are distinct from the other performance obligations.
Other Capitalized Expenses – including direct labor and materials, bid costs, sales commissions, and more.
Entities may choose one of two adoption methods: a full or modified retrospective. We are advising our clients to perform a preliminary analysis of the financial impact of the changes prescribed by the news standard and to use the analysis to determine the most appropriate adoption method. In brief, you may restate earnings for comparative periods, or adjust retained earnings and disclose the change in policy. We plan to describe how the efficiently perform the analysis at a later time.
Our recommendation is to avoid overreaction but be prepared. It’s good to have a conversation now with your finance team to prepare.
Need help starting this conversation CONTACT US to get details on how to be prepared for the second half of this year!