Getting Your Non-Public SaaS Business Prepared for … Slide...Getting Your Non-Public SaaS Business...
41
Getting Your Non-Public SaaS Business Prepared for the New Revenue Recognition Standards (ASC 606) Presented by: Steve Sehy, CPA, MBA Sponsors: SaaS Capital, SaaSOptics September 20, 2017
Transcript of Getting Your Non-Public SaaS Business Prepared for … Slide...Getting Your Non-Public SaaS Business...
GettingYourNon-PublicSaaSBusinessPreparedfortheNewRevenueRecognitionStandards(ASC606)
Presentedby:SteveSehy,CPA,MBASponsors:SaaSCapital,SaaSOpticsSeptember20,2017
Welcome– AboutSaaSOptics…
David RyanFounder and COO
350Customers
$2.8B+ManagedRevenue
$3BInVentureCapitalandPrivateEquityRaised
Welcome– AboutSaaSCapital…
43CompaniesFunded
$400MofEquityValueCreated
100%SuccessRate
Todd GardnerFounder and Managing Director
Welcome– AboutSteveSehy,CaaSforSaaSProvidingfractionalCFOservicestoSaaScompanies• PreparingforSeriesA/Professionalfinancing• ImplementingGAAP(currentandnew)• Upgradingaccountingprocesses/systems• HandlingfinancefortheCEO
Bio:• StartedcareerinSoftwareDevelopment• MovedtoProductManagementandProductDevelopmentManagement• Auditor/CPAatRSM(previouslynamedMcGladrey)• Recentclient:ProvidedfinancialleadershipforSaaScompanyHaiku
Learningfortwoyearsoffinancialimprovements,endinginacorporateacquisitionbyaPrivateEquityfirm
Steve SehyCaaS for SaaS CFO Services
To Begin:
TakeaDeepBreath…
• ComparedtocurrentGAAP,allofthenewstandardschangethetimingbutnot theamountofrevenue
• MostnonPublicSaaScompanieswillhavea+/-5%orlessimpactonrevenuein2019basedonthechanges
• Unfortunately,theremaybealotofunderlyingworktogetthenewnumbers.
5
Agenda
• BackgroundandKeyConceptsforthenewRevenuerecognitionstandards(ASC606)(alsocalledASU2014-09)
• KeySaaSrevenuesourcesandhowtotreatthem
• ChangestoCustomeracquisitioncosts
• Allocatingtheprice
• Actionitems:Whattodoby12/31/17
• AdditionalResources
6
PollingQuestion
Whichtitlebestdescribesyourcurrentrole?(Selectone)
q Auditor/Serviceproviderq CEO/CFOofaSaaSCompanyq ControllerofaSaaSCompanyq AccountantofaSaaSCompanyq Other
7
NewRevenueRecognition- Background
AccountingName(ASUNo.2014-09,ASCTopic606)–RevenuefromContractswithCustomers:• Affectsallindustries• Attemptingtohaveasingleprocessfordeterminingrevenueinall
situations/industries• Principlesvs.Rules• ConvergencebetweenU.S.GAAPandInternationalGAAP• Fornon-publiccompaniesneedstobeinplaceforCalendaryear2019.(For
SaaScompaniesthiswillincludeannualandmulti-yearagreementsmadein2018).
8
NewRevenueRecognition
Thisstandardisamovingtargetbecause:• Principlesvs.Rules– “judgement”usedtodeterminemethods
• SECrulesmay“interpret”thestandards
• Precedentsmaybesetby“firstimplementations”
• U.S.LegalEnvironment– lawsuitsmayimpactstandards
• AuditFirmpositions– may“interpret”thestandards.
9
NewRevenueRecognition
RevenueRecognitionChangesWeareNOTcovering:• Collectibility
• Softwarelicenses(oldschoolsoftware)
• Hardware
• Usagefees(e.g.#oftransactions,#ofGigs)
• Contractmodifications*
• Disclosures/Footnotesfornon-publiccompanies*
*Everyoneshouldprobablylearnthis,wejustdon’thavetime.
10
KeyConcepts
CorePrincipleSteps
1. Identifythecontractwithacustomer
2. Identifytheperformanceobligationsinthecontract
3. Determinethetransactionprice
4. Allocatethetransactionpricetotheperformanceobligations
5. Recognizerevenuewhen(oras)eachperformanceobligationissatisfied.
11
KeyConceptsPerformanceobligationtiming
• Pointintime(aftertrainingisprovided&invoiced– recognizerevenuethen)• Satisfiedovertime(recognizerevenueonasinglebasisovertime)
OverTime:Output-basedMethods• Appraisalsofresultsachieved
(e.g.%complete)• Milestonesreached• Timeelapsed
OverTime:Input-basedMethods• Resourcesconsumed• Costsincurred• Time-based• Laborhoursexpended.
12
KeyConcepts
CommonPerformanceobligationsforSaaS(Thisisnotbasedonhowyoubillyourcustomers.Itisbasedontheservicesyouprovide.)
1. Subscription(Accesstothehostedsoftware)
2. Installation(vs.Setup/initiationfees)
3. Training
4. OngoingSupport
5. OngoingUpgradestothesoftware
6. CustomDevelopment/“PromisedFeatures”
13
Revenuebytype
ExamplesofCommonPerformanceobligationsforSaaS• KeyChangesfromcurrentGAAPwillbehighlighted• Note:Thenewstandardsmayresultinrevenuebeingtreatedthesameas
currentGAAP.
14
SaaSRevenueRecognition- Subscriptions
UsuallysatisfiedovertimeCalculatedusingtheTimeElapsed- Outputmethod
Ingeneral,theGAAPtreatmentissimilar:• Spreadtherevenueovertheperiod,buttheperiodmaychange• Optionstorenewmayimpactcurrentrevenue• Paycloseattentiontomajorcustomers!.
15
PollingQuestion
WhattypeofSubscriptionsdoyouprovideatyourcompany?(Selectallthatapply)q Monthlyq Singleyearq Singleyearwithoptiontorenewq Multi-yearq Noneoftheabove/OrnotaSaaSCompany
16
SaaSRevenueRecognition- Subscriptions
SingleYear:Customerisprovidedwithaoneyearagreementwithanoptiontorenewforasecondyearatthesameterms.• Revenueisrecognizedasaoneyearcontract.
Multi-YearMajorCustomerisprovidedaoneyearagreementwithanoptiontorenewforasecondyearata15%discount.• Revenueisrecognizedasatwoyearcontract.(becausecustomerisincentivizedtorenew)(ChangefromcurrentGAAP).
17
SaaSRevenueRecognition- SubscriptionsExamplesoftheImpactofDelivery
CustomerisprovidedwithaoneyearagreementstartingonJanuary1.Customerpays$1,200upfront.• Revenueisrecognizedas$100permonthstartingonJanuary1
CustomerisprovidedwithaoneyearagreementstartingonJanuary1andgoingtoDecember31.Customerpays$1,200upfront.InstallationtookthreemonthssocustomerstartsusingthesoftwareonApril1• Revenueisrecognizedas$1200/9permonthstartinginAprilsincecustomerdidnotreceivetheproductuntilthen.(ChangefromcurrentGAAP.)
• Customerdoesn’thaveto“signforacceptance”,butyouneedsomeverificationthattheyhave“access”
Moral– contractandactualdeliverytermsimpactrevenuerecognition.18
SaaSRevenueRecognition- Installation
UsuallysatisfiedovertimeoratcompletionDependingonyourcontract,thiscouldbecalculatedusingthe:
• TimeElapsed- Outputmethod:(e.g.Installdoneinfirst30days)
• AppraisalsofResultsAchieved– Outputmethod(e.g.%complete)
• Laborhoursexpended– InputMethod(e.g.xhoursoutof20)
• PointinTimemethod(e.g.finishedinthe3rd month)
Ifthisisamaterialcomponentofyourserviceandyoudonotchargeseparately,butnowneedtoseparatetheperformanceobligation,thiscouldimpactyourMRR(installfeesarenotrecurring).
19
SaaSRevenueRecognition- Training
SatisfiedovertimeoratapointintimeDependingonyourcontract,thiscouldbecalculatedusingthe:
• TimeElapsed- OutputMethod
• Laborhoursexpended– InputMethod
• PointinTimeMethod.
20
SaaSRevenueRecognition- TrainingExample– Revenuerecognizedovertime:Customerisprovidedwith3trainingwebinarsperweekforthefirstthreemonths.Customerpays$1,200upfront.• Revenueisrecognizedas$400permonthfor3months
Example– Revenuerecognizedashoursareexpended:Customerispromised24traininghoursoftraining.Customerpays$1,200upfront.Attheendofthefirstmonthoftheproject8traininghourshavebeendelivered.• Revenueisrecognizedas$400(8*$50)forthefirstmonth
Example– Revenuerecognizedattimeofcompletion:Customerischarged$1,000foreachon-sitedayoftraining.Attheendofthefirstmonth,twodaysoftraininghavebeenprovided.• Revenueisrecognizedas$2,000(2*$1,000)forthefirstmonth.
21
SaaSRevenueRecognition- Support
SatisfiedovertimeoratapointintimeDependingonyourcontract,thiscouldbecalculatedusingthe:
• TimeElapsed- OutputMethod,
• Laborhoursexpended– InputMethod
• PointinTimeMethod.
22
SaaSRevenueRecognition- SupportExample– Revenuerecognizedovertime:Customerisprovidedwithongoingphoneandothersupportduringaoneyearagreement.Customerpays$1,200upfront.• Revenueisrecognizedas$100permonth
Example– Revenuerecognizedashoursareexpended:Customerispromised24hoursofsupport.Customerpays$1,200upfront.Attheendofthefirstmonthoftheproject8supporthourshavebeendelivered.• Revenueisrecognizedas$400forthefirstmonth
Example– Revenuerecognizedatcompletion:Customerisinvoiced$100foreachhourofsupportprovided.Attheendofthefirstmonth,6hoursofsupporthavebeenprovided.• Revenueisrecognizedas$600forthefirstmonth.
23
SaaSRevenueRecognition- Upgrades
SatisfiedovertimeThiscouldbecalculatedusingtheTimeElapsed- Outputmethod
24
SaaSRevenueRecognition- Upgrades
Example– StandardagreementwithongoingupdatesCustomerisprovidedwithongoingupgradesduringaoneyearagreement.Customerpays$2,400upfront.• Revenueisrecognizedas$200permonth
Example– StandardagreementwithsignificantupdatesCustomerisprovidedwithongoingupgradesduringaoneyearagreement.Customeralsowaspromisedasignificantupgradewouldbedeliveredafter6monthsbasedonaroadmaponthewebsite.Customerpays$2,400upfront• Revenueisrecognizedas$100permonthforthefirstsixmonthsand$300permonthforthesecondsixmonths.(Theupgradewasdeterminedtobeworth$1,200andisrecognizedovertherestofthecontract.)(ChangefromcurrentGAAP).
25
SaaSRevenueRecognition– CustomDevelopment
CustomDevelopmentFees(or“promisedfeatures”)SatisfiedovertimeThiscouldbecalculatedusingtheTimeElapsed- Outputmethod
26
Example- Modificationiscriticaltotheoveralldeal
MajorCustomerisprovidedwithoneyear’saccessstartingJanuary1.CustomerisprovidedwithacriticalcustommodificationonMarch1.Thecustomercouldcanceltheagreementifthemodificationswerenotdoneproperly.Customerpays$2,400upfrontforthemodification
• Revenueisrecognizedas$2,400/10permonthstartingonMarch1.ThestandardsubscriptionrevenuewouldalsonotstartuntilMarch1.(ChangefromcurrentGAAP)
Example- ModificationisNOTcriticaltotheoveralldeal
MajorCustomerisprovidedwithoneyear’saccessstartingJanuary1.Customerisprovidedwithanon-criticalcustommodificationonMarch1.Thecustomerwouldjustreceivetheircustomdevelopmentfeebackifthemodificationswerenotdoneproperly.Customerpays$2,400upfrontforthemodification
• Revenueisrecognizedas$2,400/10permonthstartingonMarch1.ThestandardsubscriptionrevenuewouldstartonJanuary1.(ChangefromcurrentGAAP).
SaaSRevenueRecognition– CustomDevelopment
27
SaaSRevenueRecognition– Costs
CustomerAcquisitionandSetupCosts(Huh?IthoughtthiswasaRevenuerecognitionchange…)
• ThiswasanoptionincurrentGAAP.Itisnowrequiredandappliestoallincrementalcosts,notjustdirectcosts.
• Ingeneral:Thestandardindicatesthatthesecostsshouldbeconsistentwiththerevenuerecognitionwhichgenerallymeanscapitalizingandamortizing
• CreatesanAsset:Deferredcosts(orDeferredcommissions)• Practicalexpedient– Iftheagreementisforoneyearorless,youcanjustexpense.• Costsincrementaltoacquiringthiscustomer(notgeneralmarketingorpre-sales)
28
SaaSRevenueRecognition– Costs
CustomerAcquisitionCosts• Incremental• Commissions(couldincludesalesperson,manager,regionalmanager)• Bonus(iftotallybasedonsales,ifbasedonotherfactorswouldprobablynotqualify)
29
SaaSRevenueRecognition– Costs
CustomerSetupCostsandCostAmortization
• SetupCosts:Capitalizeifdirectlyrelatedtoacontract,itcreatesacompanyresource,costsareexpectedtoberecoverable
• SetupCosts:Couldincludethesalariesofanimplementationteam
• AmortizationofCosts:Couldbebasedonacontract,aspecificperformanceobligationoranticipatedrenewals.Managementdeterminestheamortizationperiod.
• Amortizationwouldnotincludeanticipatedrenewalsifcostsarethesameforeachagreement(e.g.2%commissiononfirstyearandeachrenewal)
• Amortizationwillincludeanticipatedrenewalsifcostsaredifferent(e.g.8%commissiononsaleand2%commissionforrenewals)(Amortizeovermanagementestimateofcustomerlife)(Eitherthetotal8%ortheamountovertherenewalamount6%).
30
SaaSRevenueRecognition– Costs
CustomerAcquisitionandSetupCosts(Balancesheet- Deferredcosts)
Example- Commissions:Customerisprovidedwithtwoyear’saccesstothesystemstartingJanuary1.Salescommissionforthetwoyearagreementis$2,400• Salescommissioniscapitalizedasanasset.Costisrecordedas$100permonthstartingonJan1
Example– SetupCosts:Customerisprovidedwithoneyear’saccesstothesystemstartingJanuary1.Incrementalcostofcustomersetupis$3,600.Managementdeterminesthatcustomerisexpectedtorenewforatleasttwomoreyears• Customercostiscapitalizedasanasset.Costisrecordedas$100permonthstartingonJanuary1.Spreadoverthethreeyearexpectedlifeoftheasset.
31
AllocatingthePrice
ThetransactionisallocatedbasedonStand-alonesellingpriceorEstimatedStand-alonesellingprice.(SeeAdditionalResourcesformoreinfo)
Stand-alonesellingpricecanbeestablishedifitemsaresoldseparately.Example:Annualphonesupportissoldseparatelyfor$1,200peryear.
Iftheitemisneversoldbyitself,thestandalonesellingpriceneedstobeestimated.Example:Phonesupportisalwaysincludedwithasubscription.
32
AllocatingthePriceSimpleoption:IfallofthePerformanceObligationswillbetreatedthesame,thenyoudon’tneedtoallocatetheprice.
Example– Allperformanceobligationsrecognizedthesameway:AnnualSubscription,phonesupportandupgradesarealwayssoldtogetherandwillallbeallocatedovertheyear.Theycanbetreatedasoneitemforpriceallocation.• Subscription,phonesupportandupgradesaresoldfor$3,600forayear.Theseitemswouldnotneedtobeallocated
Example– Performanceobligationsrecognizeddifferently:AnnualSubscription,phonesupportandupgradesarealwayssoldtogether,howeverphonesupportisbasedonhourswhiletheotheritemswillallbeallocatedovertheyear.Theycannotbetreatedasoneitemforpriceallocation• Subscription,phonesupportandupgradesaresoldfor$3,600forayear.Theseitemswouldneedtobeallocatedbetweenthesubscription/upgradesandphonesupport.
33
ComprehensiveexampleGoldproductAnnualPlan:Includeshosting,support,ongoingsoftwareupdates,90dayinstallationservicesand5hoursoftraining.Salespersongets10%commissiononnewbusinessand5%onrenewals.Clientissentalogin/passwordonthefirstdayoftheagreement
Performanceobligations:• Subscription,Support,Upgrades,Installation,Training• Overtime– oneyear:Subscription,Support,Upgrades• Overtime– 90days:Installation• Overtime– laborhours:TrainingAcquisitioncosts:• 5%“extra”commissionallocatedover3yearestimatedlifeofasset.
34
WhatYouNeedToDoBy12/31/17
1. Assembleyourteam
2. Identifyhowyouwilltreateachofyourtypesofrevenue,includinghowyouwillgroupthemforpriceallocation
3. Identifyhowyouwilltreatcustomeracquisitioncosts
4. Determinehowyouwillallocatethepriceindealswithmultipleperformanceobligations
5. ReviewyourstandardcontractsandTermsofService(Basedontheabove.Shouldbeinplaceon1/1/18.).
35
WhatYouNeedToDoBy12/31/176. Implementaprocessofpre-approvalorreviewofanycustomerspecificcontract
modificationsfornewandexistingdeals7. Contactyourauditororduediligencereviewer(oraconsultant)andconfirmyour
documentedconclusionsforthestepsabove.8. Determinehowyouwilltransition:Youcanselecteitherthefullretrospective(recast
allnumbersforprioryears)ormodifiedretrospectivemethod.(disclosekeyprioryearchanges)
9. Prepareastatementforinvestors,potentialinvestors,orbankers:Ideallythisshouldbesomethinglike…“Wehavereviewedtheimpactofthenewrevenuerecognitionrulesfortheirimpactonourfinancials.Basedonourreview,from1/1/2019our(typeofrevenue..)revenuewillbeaffectedandthechangewillaccelerate/delaytherecognitionofthisrevenue.Currentlythisrevenueisonlyxx%ofourtotalrevenue.”Theywillnotwanttohear“Wedon’tknow”whentheyask thisquestion.
36
CalltoAction/ToDoList10. Identifyifyourcurrentfinancialsystemswillsupportyourchangeswhenneeded
By1/1/19youshouldableto:• Recordnew/renewingcontractsundernewstandards• Re-castexistingcontractsintonewstandards• Collectinformationneededfordisclosures.
37
PollingQuestion
ForSaaScompanyemployees,whatrevenuerecognitionchangepreparationstepshaveyoualreadycompleted?(Selectallthatapply)
q IdentifiedPerformanceObligationsandpriceallocationq Determinedacquisitioncostpolicyq ReviewedcurrentcontractsandTermsofServiceq Determinedimplementationplanq AttendedaWebinar
38
AdditionalResourcesNote:SomedonotdifferentiatebetweenthestandardsforPublicvs.Privatecompanies.
• Sehy - 10StepsToPrepareForTheNewRevenueRecognitionStandards– SoftwareExecutiveMagazine–OctoberIssue
• pwc NewRevenueguidance–Implementationinthesoftwareindustry– July2017,31pages• http://www.pwc.com/us/en/cfodirect/publications/in-depth/revenue-implementation-guidance-
technology-industry.html
• RSMRevenueRecognition:AWholeNewWorld– Jan2017,43pages• http://rsmus.com/what-we-do/services/assurance/revenue-recognition-a-whole-new-world.html
• RSMChangestorevenuerecognitioninthetechnologyindustry– Jan2017,18pages• http://rsmus.com/what-we-do/services/assurance/financial-reporting-resource-center/financial-reporting-
resource-center-revenue-recognition/changes-to-revenue-recognition-in-the-technology-industry.html
• KPMGRevenueforSoftwareandSaaS– March2017,648pages• https://frv.kpmg.us/reference-library/2017/03/revenue-for-software-and-saas.html
39
NewRevenueRecognitionStandards
Questions?
40
