Multiple element revenue arrangements a csp may provide its users with a number of different services. Saas businesses must get revenue recognition right every time. Delivery in a hosting arrangement within the scope of sop 972 52 182. A software vendor that enters into a hosting arrangement should apply the following steps to determine the applicable literature for identifying the units of accounting and the revenue recognition method for the units. Fasb addresses accounting for implementing certain cloud. The definition of hosting arrangement in the asc master glossary would be amended by 1 removing the reference to licensing, 2 eliminating the requirement for the software to reside on the vendors or a third partys hardware, and 3 replacing the phrase does not take possession with does not currently have possession. Defining issues 1515 fasb issues guidance on custoerms. Dobartech is a softwareasaservice saas company that offers encrypted cloudbased enterprise resource planning erp, order management, customer relationship management crm, and ecommerce application services. It provides an overview of the revenue recognition model in ifrs 15 and highlights key considerations for the software industry. In may 2014, the financial accounting standards board fasb or board and the international accounting. Gaap consolidation identifying a controlling financial interest. One of the most challenging aspects of the new revenue guidance in these arrangements is applying step 2 in the new. New revenue guidance implementation in the software industry.
The financial accounting standards board fasb has codified specific accounting standards for recognizing revenue for software companies. Under current guidance, firm a would allocate a contract including deliverables within and outside the scope of software revenue recognition between software and nonsoftware components using the relative selling price method based on the multipleelement arrangement guidance in asc subparagraph 60525153a. The complete guide to saas revenue recognition with asc 606. Jul 11, 2007 a software vendor that enters into a hosting arrangement should apply the following steps to determine the applicable literature for identifying the units of accounting and the revenue recognition method for the units. Software license arrangements can be organized as a hosting arrangement, saas, a hybrid of both hosting and saas, or direct delivery to the customerall of which have different implications for the application of each of the five steps of the new revenue recognition model. Iasb and the fasbs joint transition resource group for revenue recognition trg held in march 2015. Software revenue recognition is a more complex contract term. Asc 60555121 states that a software arrangement is within the scope of asc 985605 if the customer has the contractual.
There is, however, an exception that when one delivery is the predominant deliverable, then the revenue recognition may commence once the delivery of that item has occurred. Revenue recognition for saas businesses is inherently complex, and depends on your specific revenue model. Gaap only provided explicit guidance for cloud computing providers to determine whether. The asu specifies that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straightline basis unless another systematic and rational basis is more representative of the pattern in which the entity expects to benefit from access to the hosted software. On the other hand, accounting standard update asu 201505 simplifies accounting for. Revenue management can quickly get complex when you consider multiple entities, subscriptions, licenses, services, etc. Fasb proposes improvements to accounting for costs of implementation activities performed in certain cloud computing arrangements norwalk, ct, march 1, 2018the financial accounting standards board today issued a proposed accounting standards update that would clarify the accounting for implementation costs related to a cloud computing arrangement that is a service contract. Hosting arrangements that do not meet the criteria in asc 35040154a. For example, the standard results in the elimination of the requirement for vendorspecific objective evidence of fair value, introduces potential difficulty in determining the fair value of software licenses in an arrangement, in evaluating the appropriate accounting for hybrid license arrangements, in assessing hosting and termbased license arrangements, and in the timing of revenue recognition for royalty arrangements or arrangements with resellers, which can require the use of new. Fasb proposes improvements to accounting for costs of. Business combinations business combinations sec reporting considerations carveout transactions comparing ifrs standards and u. Mar 22, 2016 regulations new revenue recognition standard means big changes for software companies.
The guidance states that two criteria must be satisfied. Technology spotlight recognizing revenue from saas arrangements. A new accounting standard, effective for years beginning after december 15, 2015 calendar year 2016, addressed accounting for cloud computing costs. Banking, finance and accounting business accounting computer programs forecasts. Hosting arrangement dart deloitte accounting research tool.
Figure 1how the service models compare to typical packaged software. Fortunately for most businesses, asc 606 brings a level of consistency and clarity that did not exist before in saas accounting the wild west is being tamed, and thats a good thing for all of us. Software revenue recognition rules for subscription services. Implementing the new revenue guidance in the technology industry. A cca can facilitate implementation of accounting changes and create significant efficiencies. On the other hand, accounting standard update asu 201505 simplifies accounting for cloud computing contracts, by providing clarity on an issue that has been a source of confusion for some time. K ey accounting issues determining the appropriate u.
In the process of developing accounting policies for revenue recognition for saas arrangements, vendors may have to look at the guidance in sab topic. Regulations new revenue recognition standard means big changes for software companies. For additional information about applying these criteria, see chapter a. Asu 201815, customers accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. These are best understood through comparison with typical, precloud packaged software as in figure 1. Revenue recognition for saas and software companies. The reseller essentially purchase the service agreement from the supplier, and resell it at a markup to the end customer. The proposal would align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs. Many companies and accounting firms have been focusing on new standards on revenue recognition and accounting for leases, hedging, and credit losses.
Differing revenue recognition requirements for ip licenses one area of concern arises from the different treatment within topic 606 and the proposed asu for transactions involving software and. Revenue recognition for cloudbased computing arrangements. Per our audit, for contracts that are true hosting arrangements i. New revenue recognition standard means big changes for. Many companies have also been implementing the new revenue recognition and lease accounting standards. But another new fasb standard on cloud computing costs associated with a service arrangement became effective for public business entities in fiscal years beginning on or after dec. Revenue recognition within the software industry has historically been highly complex with much industryspecific guidance. Oct 30, 2017 examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. Under current guidance, firm a would allocate a contract including deliverables within and outside the scope of software revenue recognition between software and nonsoftware components. Revenue recognition by reseller var for service contract. Fasb clarifies customers accounting for implementation.
Dobartech is a softwareasaservice saas company that offers encrypted cloudbased enterprise resource planning erp, order management, customer relationship management crm, and e. Is it complete or does it require constant updates. In many cases, software licensing companies can recognize a significant portion of the arrangement fee as revenue when the software license is delivered to the customer. In connection with accessing and using software products, an arrangement in which the customer of the software does not currently have possession of the software. It often differs from customer to customer and sometimes even for the same deliverable.
Reassessment of revenue recognition accounting policies 32. As a result, it is critical that there is an understanding of the terms for each arrangement. If it is a software sale, then it is recognized following the rules outlined within asu 2009 regarding revenue recognition in multiple element arrangements. Packaged software customer managed applications data runtime middleware os virtualisation servers storage networking vendor. Apply the criteria of eitf 003 to determine whether sop 972 applies to the hosting arrangement. Technology spotlight recognizing revenue from saas. The proposal would align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred in developing or obtaining internaluse software and hosting arrangements that include an internaluse software license.
Hosting penalties when a customer takes possession of the software without incurring significant cost 31 215. As part of this journey, many are exploring technology solutions including cca to automate and optimize. The impact of the new revenue recognition guidance on cloud. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos some of the common significant themes associated with its application by entities in the software and software asaservice saas sectors, using insights and. Evidence of the arrangement should be consistent with the. Determination of whether significant costs are incurred in a hosting arrangement 30 2. For a discussion of the key considerations for technology entities that do not currently. What is the correct revenue recognition accounting by a reseller who resells e. The impact of the new revenue recognition guidance on. The new lease accounting standards add complexity to how you address service contracts. Gaap consolidation identifying a controlling financial interest contingencies and loss recoveries contracts on an entitys own equity convertible debt current expected credit losses disposals of longlived assets and discontinued operations distinguishing. The definition of hosting arrangement in the asc master glossary would be amended by 1 removing the reference to licensing, 2 eliminating the requirement for the software to reside on the vendors or a.
The standard provides a comprehensive, industryneutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduce the. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty. The complete guide to saas revenue recognition with asc. The software suite operates entirely on the cloud, hosted on dobartechs digital infrastructure. Suite 110, troy, mi 48083, and solution x global, a delaware llc, vendor having its principal place of business at 3520 n. Apr 23, 2019 the new lease accounting standards add complexity to how you address service contracts. Implementing the new revenue guidance in the technology. A software vendor that enters into a hosting arrangement should apply the following steps to determine the applicable literature for identifying the units of accounting and the revenue. However, if the software is actually sold as a service, or saas model, then revenue recognition needs to follow the rules established by sab 104 and sop 972. Aug 05, 2014 what is the correct revenue recognition accounting by a reseller who resells e.
Asc topic 606 provides a single set of revenue recognition principles governing all. The software revenue recognition guidance in asc 985605 is often inapplicable to saas arrangements since customers seldom have the ability to take possession of the software at any time during the hosting arrangement. Revenue recognition, cloud revenue recognition sage intacct. Figure 1how the service models compare to typical packaged software cloud computing explained. Asc 98560555121 states that for a software element in a hosting. Revenue recognition is a generally accepted accounting principle gaap and a fundamental aspect of the accrual basis of saas accounting. The following two case studies reflect the analysis of revenue recognition guidance for cloudbased arrangements prior to asu 2009.
Software revenue recognition rules for subscription. Gaap only provided explicit guidance for cloud computing providers to determine whether an arrangement includes a license of software to evaluate whether the software revenue recognition guidance applies to a revenue transaction. For example, ip licenses serve as the essence of a software hosting arrangement. Fasb clarifies customers accounting for implementation costs. Asc 60555121 states that a software arrangement is within the scope of asc 985605 if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty to either run the software. The rate for private companies is even more astonishing. Defining issues 1819 fasb issues asu on accounting for. Asc 606 supersedes all industryspecific guidance, including asc 985605, software. Topic provides the staffs views regarding the general revenue recognition guidance codified in asc topic 605. Software revenue recognition a roadmap to applying aicpa. Generally, internal use software obtained through a hosting arrangement is accounted for as a software license if the user has the right to possess the software at any time during the hosting period without incurring a significant penalty and the user can either run the software on its own hardware or contract with a party unrelated to the provider to host the software asc 60555121. Fasb proposes improvements to accounting for costs of implementation activities performed in certain cloud computing arrangements norwalk, ct, march 1, 2018the financial accounting standards.
Common pitfalls to software revenue recognition complex arrangement terms. Software companies are often tasked with deconstructing the typical bundles of product and services, and then determining the separate selling price of each of those elements. This software and hosting services agreement agreement is by and between fva ventures inc. Common pitfalls to software revenue recognition complex arrangement terms global nature of business environment. Terminology throughout this handbook, the terms software licensing arrangement and saas arrangement are used. The term of the hosting arrangement should include the fixed noncancellable periods plus renewal periods the customer is reasonably certain to exercise, termination. The software entities revenue recognition task force has been created to address issues which may arise due to fasbs new revenue recognition standard. Saas revenue recognition concepts guide software as a. Differing revenue recognition requirements for ip licenses one area of concern arises from the different treatment within topic 606 and the proposed asu for transactions involving software and other forms of ip licenses. Gaap and accounting for cloud computing arrangements wipfli. Saas revenue recognition concepts in the process of developing accounting policies for revenue recognition for saas arrangements, vendors may have to look at the guidance in sab topic.
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