The FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) recently published a joint revenue standard that changes the way companies can recognize revenue. It provides a single standard for all companies in all industries. (read the joint standards document here)
How the FASB Revenue Standards Affects SaaS Companies
If you use generally accepted accounting principles (GAAP), this means you will will likely have to change the way you are reporting revenue.
Handling Multiple Services in the Same Contract
The new standards require companies to identify performance obligations separately. We will start with an example of Acme Corporation who sold:
- 1 Year Annual Software Agreement starting in January
- A 3-day consulting engagement in July
- A software customization package to be delivered in October
With the new accounting standards revenue must be recognized in the following way:
- Revenue from the Annual Software Agreement must be recognized evenly throughout the year. (see our article on how to calculate deferred revenue for more information)
- Revenue from the consulting engagement must be separately recognized in July
- Revenue from the software customization package should be recognized when it is delivered, in October
Handling Contract Changes
It is common for SaaS companies to modify a contract before it expires. One example is adding more users as the customer grows. Another is for companies that use a consumption-based pricing model where a customer may be charged more for increased consumption such as file storage.
The new standards laid out by the FASB recommend clearly stating when these events will occur and how clients will be billed.
How Can You Ensure You Are Ready?
If you are using an accounting system such as QuickBooks, revenue recognition can be a little difficult and involve manual processes to ensure you are in compliance. ProRata was purpose built with these requirements in mind. ProRata can integrate with your QuickBooks account and help you meet the new standards.