Getting Your SaaS Business Prepared for the New Revenue Recognition Rules … … · ·...
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Getting Your SaaS Business Prepared for the New Revenue Recognition Rules (ASC 606) Presented by: Steve Sehy, CaaS for SaaS Moderator: Chris Weber, SaaSOptics June 20, 2017
Transcript of Getting Your SaaS Business Prepared for the New Revenue Recognition Rules … … · ·...
GettingYourSaaSBusinessPreparedfortheNewRevenueRecognitionRules(ASC606)
Presentedby:SteveSehy,CaaS forSaaSModerator:ChrisWeber,SaaSOpticsJune20,2017
Welcome– 30secondsaboutus
SaaSOptics providesboth:• SaaSFinancials• SaaSMetricsCustomershavecollectivelyraised~$2BinVCandPEUntoldhoursofduediligenceandauditscrutiny
SteveSehy,CaaS forSaaSProvidingfractionalCFOservicestoSaaScompanies• ImplementingGAAP• PreparingforSeriesA/Professionalfinancing• Upgradingaccountingprocesses/systems• HandlingfinancefortheCEO
StartedcareerinSoftwareDevelopmentMovedtoProductManagementandProductDevelopmentManagementAuditoratRSM(previouslyMcGladrey)Keyclient:ProvidedfinancialleadershipforSaaScompanyHaikuLearningfortwoyearsoffinancialimprovements,endinginacorporateacquisitionbyaPrivateEquityfirm
WhyWe’reHere
SaaSCompanyAccountants/Management:• Tohelpyoutostarttheprocessofconvertingtothenewrevenue
recognitionrules.
Auditors/AccountingServiceproviders:• Tohelpyoutoworkwithyourclientsthroughtheprocessof
convertingtothenewrevenuerecognitionrules.
Agenda
• BackgroundandKeyConceptsforASC606
• KeySaaSrevenuesourcesandhowtotreatthem
• Allocatingtheprice
• ToDoList/CalltoAction
• Q&A
PollingQuestion
Whichtitlebestdescribesyourcurrentrole?(Selectone)
q Auditor/Serviceproviderq CEO/CFOofaSaaSCompanyq ControllerofaSaaSCompanyq AccountantofaSaaSCompanyq Other
NewRevenueRecognition- Background
AccountingName(ASUNo.2014-09,ASCTopic606)–RevenuefromContractswithCustomers:• Affectsallindustries• Attemptingtohaveasingleprocessfordeterminingrevenueinall
situations/industries• Principlesvs.Rules• ConvergencebetweenU.S.GAAPandInternationalGAAP• Fornon-publiccompaniesneedstobeinplaceforCalendaryear
2019.(ForSaaScompaniesthiswillincludeannualandmulti-yearagreementsmadein2018)
NewRevenueRecognition
Disclaimers:• Principlesvs.Rules– “judgement”
• SECrules
• Precedentssetby“firstimplementations”
• U.S.LegalEnvironment
• Auditorconclusions
• 50Minutes
NewRevenueRecognition
WeareNOTcovering:• Collectibility• Publiccompanies• Softwarelicenses(oldschoolsoftware)• Hardware• Usagefees• Contractmodifications*• Disclosures/Footnotesfornon-publiccompanies*
*Youshouldprobablylearnthis,wejustdon’thavetime.
PollingQuestion
Whatisyourmainreasonforattendingthiswebinar?
q Betterreportingofrevenueq Clearerdepictionofcompanyhealthq BecausewehavetoinordertobeincompliancewithGAAP(whichmostSeriesAtypefinancingsourceswillrequire).
KeyConcepts
CorePrincipleSteps
1. Identifythecontractwithacustomer2. Identifytheperformanceobligationsinthecontract3. Determinethetransactionprice4. Allocatethetransactionpricetotheperformanceobligations5. Recognizerevenuewhen(oras)eachperformanceobligationissatisfied
KeyConcepts
CommonPerformanceobligationsforSaaS• Subscription(Accesstothesoftware)• Installation(vs.Setup/initiationfees)• Training• OngoingSupport• OngoingUpgradestothesoftware• CustomDevelopment
KeyConcepts
Performanceobligationtiming• Pointintime(atmomentofsaleinastore– recognizerevenueatthattime)• Satisfiedovertime(recognizerevenueonasinglebasisovertime)
Output-basedMethods• Appraisalsofresultsachieved
(e.g.%complete)• Milestonesreached• Timeelapsed
Input-basedMethods• Resourcesconsumed• Costsincurred• Time-based• Laborhoursexpended
Revenuebytype
CommonPerformanceobligationsforSaaS• WewillpresenthowtheycanbetreatedunderthenewGAAP• Showingexamplesofvarioussituations
SaaSRevenueRecognition- Subscriptions
Subscriptions• Usuallysatisfiedovertime• CalculatedusingtheTimeElapsed- Outputmethod
SaaSRevenueRecognition- SubscriptionsExamples:CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreement.Customerpays$1,200upfront.• Revenueisrecognizedas$100permonth.
CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreement.Customerpays$100permonth.• Revenueisrecognizedas$100permonth.
CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreement.Customerpays$300perquarter.• Revenueisrecognizedas$100permonth.
Moral– timingofpaymentsdoesnotimpactrevenuerecognition.
SaaSRevenueRecognition- Subscriptions
Examples:CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreementwithanoptiontorenewforasecondyearatthesameterms.• Revenueisrecognizedasaoneyearcontract.
CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreementwithanoptiontorenewforasecondyearata15%discount.• Revenueisrecognizedasatwoyearcontract.(becausecustomerisincentivizedtorenew)
SaaSRevenueRecognition- SubscriptionsImpactofDelivery
Examples:CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreementstartingonJanuary1.Customerpays$1,200upfront.• Revenueisrecognizedas$100permonthstartingonJanuary1.
CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreementstartingonJanuary1.Customerpays$1,200upfront.InstallationtakesthreemonthssocustomerstartsusingthesoftwareonApril1.• Revenueisrecognizedas$1200/9permonthstartinginAprilsincecustomerdidnotreceivetheproductuntilthen.
CustomerisprovidedwithaccesstotheSaaSproductwithaoneyearagreementstartingafterinstallation.Customerpays$1,200upfront.InstallationtakesthreemonthssocustomerstartsusingthesoftwareonApril• Revenueisrecognizedas$100permonthstartingonApril1.
Moral– contracttermsimpactrevenuerecognition.
SaaSRevenueRecognition- Installation
InstallationFees• Usuallysatisfiedovertime• Dependingonyourcontract,thiscouldbecalculatedusingthe:1. TimeElapsed- Outputmethod,2. AppraisalsofResultsAchieved– Outputmethod3. Laborhoursexpended– InputMethod4. PointinTimemethod
SaaSRevenueRecognition- Installation
Examples:Customerisprovidedwithinstallationservicesforthefirst60days.Thisprocessispredictableandconsistentforallcustomers.Customerpays$1,200upfront.• Revenueisrecognizedas$600permonthfor2months.
Customerisprovidedwithinstallationservicesuntiltheinstallationiscomplete.Thisprocessistrackableandpredictable.Customerpays$1,200upfront.Attheendofthefirstmonththeprojectisestimatedtobe33%complete.• Revenueisrecognizedas$400forthefirstmonth.
Customerisprovidedwithinstallationservicesasabundleofhours.Customerpays$1,200upfrontfor12hours.Attheendofthefirstmonththeprojecthasconsumed8hours.• Revenueisrecognizedas$800forthefirstmonth.
SaaSRevenueRecognition- Installation
Examples(cont.):
Customerisprovidedwithinstallationservicesuntiltheinstallationiscomplete.ManystepsintheprocessarenotunderthecontroloftheSaaSvendorsotheamountoftimeorlaborinvolvedcannotbeestimated.Customerpays$1,200upfront.Afterthreemonths,theinstallationiscompleted.• Revenueisrecognizedas$0permonthfor2monthsand$1,200forthethirdmonth.
SaaSRevenueRecognition- Training
TrainingFeesSatisfiedovertimeoratapointintimeDependingonyourcontract,thiscouldbecalculatedusingthe1. TimeElapsed- Outputmethod,2. Laborhoursexpended– InputMethod3. PointinTimemethod
SaaSRevenueRecognition- TrainingExamples:Customerisprovidedwith3trainingwebinarsperweekforthefirstthreemonths.Customerpays$1,200upfront.• Revenueisrecognizedas$400permonthfor3months.
Customerispromised24traininghoursoftraining.Customerpays$1,200upfront.Attheendofthefirstmonthoftheproject8traininghourshavebeendelivered.• Revenueisrecognizedas$400forthefirstmonth.
Customerischarged$1,000foreachon-sitedayoftraining.Attheendofthefirstmonth,twodaysoftraininghavebeenprovided.• Revenueisrecognizedas$2,000forthefirstmonth.
SaaSRevenueRecognition- Support
SupportFeesSatisfiedovertimeoratapointintimeDependingonyourcontract,thiscouldbecalculatedusingthe1. TimeElapsed- Outputmethod,2. Laborhoursexpended– InputMethod3. PointinTimemethod
SaaSRevenueRecognition- SupportExamples:Customerisprovidedwithongoingphoneandothersupportduringaoneyearagreement.Customerpays$1,200upfront.• Revenueisrecognizedas$100permonth.
Customerispromised24hoursofsupport.Customerpays$1,200upfront.Attheendofthefirstmonthoftheproject8supporthourshavebeendelivered.• Revenueisrecognizedas$400forthefirstmonth.
Customerischarged$100foreachhourofsupport.Attheendofthefirstmonth,6hoursofsupporthavebeenprovided.• Revenueisrecognizedas$600forthefirstmonth.
SaaSRevenueRecognition- Upgrades
UpgradeFeesSatisfiedovertime
ThiscouldbecalculatedusingtheTimeElapsed- Outputmethod,
Examples
Customerisprovidedwithongoingupgradesduringaoneyearagreement.Customerpays$2,400upfront.
• Revenueisrecognizedas$200permonth.
Customerisprovidedwithongoingupgradesduringaoneyearagreement.Customeralsowaspromisedasignificantupgradewouldbedeliveredafter6months.Customerpays$2,400upfront.
• Revenueisrecognizedas$100permonthforthefirstsixmonthsand$300permonthforthesecondsixmonths.(Theupgradewasdeterminedtobeworth$1,200andisrecognizedovertherestofthecontract.)
SaaSRevenueRecognition– CustomDevelopment
CustomDevelopmentFeesSatisfiedovertimeThiscouldbecalculatedusingtheTimeElapsed- Outputmethod
CustomDevelopmentFeesExamples:
Customerisprovidedwithoneyear’saccesstothesystemstartingJanuary1.CustomerisprovidedwithacriticalcustommodificationonMarch1.Thecustomercouldcanceltheagreementifthemodificationswerenotdoneproperly.Customerpays$2,400upfrontforthemodification.
• Revenueisrecognizedas$240permonthstartingonMarch1.ThestandardsubscriptionrevenuewouldalsonotstartuntilMarch1.
Customerisprovidedwithoneyear’saccesstothesystemstartingJanuary1.Customerisprovidedwithanon-criticalcustommodificationonMarch1.Thecustomerwouldjustreceivetheircustomdevelopmentfeebackifthemodificationswerenotdoneproperly.Customerpays$2,400upfrontforthemodification.
• Revenueisrecognizedas$240permonthstartingonMarch1.ThestandardsubscriptionrevenuewouldstartonJanuary1.
SaaSRevenueRecognition– CustomDevelopment
SaaSRevenueRecognition– Costs
CustomerAcquisitionandSetupcosts(Huh?IthoughtthiswasaRevenuerecognitionchange)
• Ingeneral:Thesecostsshouldmatchtherevenuerecognition• Quickanswer– Ifoneyearorless,canjustexpense• Costsdirectlyrelatedtoacquiringthiscustomer(notgeneralmarketingorpre-sales)• CreatesanAsset:Deferredcosts• Satisfiedovertime• ThiscouldbecalculatedusingtheTimeElapsed- Outputmethod
SaaSRevenueRecognition– Costs
CustomerAcquisitionandSetupCosts
Examples:
Customerisprovidedwithtwoyear’saccesstothesystemstartingJanuary1.Salescommissionforthetwoyearagreementis$2,400.• Salescommissioniscapitalizedasanasset.Costisrecordedas$100permonthstartingonJan1.
Customerisprovidedwithoneyear’saccesstothesystemstartingJanuary1.Directcostsofcustomersetupis$3,600.Customerisexpectedtorenewforatleasttwomoreyears.• Customercostiscapitalizedasanasset.Costisrecordedas$100permonthstartingonJanuary1.Spreadoverthethreeyearexpectedlifeoftheasset.
AllocatingthePrice
The“deal”doesnotmatterforallocatingtheprice
Customer1GoldPlanincludessubscription,hosting,supportandupgradesforoneyear.Customercharged$4,800.
Customer2Customerchargedbyitem:subscription$2,000,hosting$800,support$1,000,upgrades$1,000.Totalof$4,800.
Customer3Customerchargedforsomeitems,Othersare“free”:subscription$2,800,hostingfree,supportfree,upgrades$2,000.Totalof$4,800.
AllarethesameforGAAP– totalpriceof$4,800
AllocatingthePrice
ThetransactionisallocatedbasedonStand-alonesellingpriceorEstimatedStand-alonesellingprice.
Stand-alonesellingpricecanbeestablishedifitemsaresoldseparately.Example:Annualphonesupportissoldseparatelyfor$1,200peryear.
Iftheitemisneversoldbyitself,thestandalonesellingpriceneedstobeestimated.Example:Phonesupportisalwaysincludedwithasubscription.Therearealotofissuestoconsiderwhenestimatingastand-alonesellingprice.Lotsmorereadingyoucando.However,forsomesituations,thiscanbeavoided…(nextslide)
AllocatingthePrice
Simpleoption:IfallofthePerformanceObligationswillbetreatedthesame,thenyoudon’tneedtoallocate.Example#1:AnnualSubscription,phonesupportandupgradesarealwayssoldtogetherandwillallbeallocatedovertheyear.Theycanbetreatedasoneitemforpriceallocation.• Subscription,phonesupportandupgradesaresoldfor$3,600forayear.Theseitemswouldnotneedtobeallocated.
Example#2:AnnualSubscription,phonesupportandupgradesarealwayssoldtogether,howeverphonesupportisbasedonhourswhiletheotheritemswillallbeallocatedovertheyear.Theycannotbetreatedasoneitemforpriceallocation.• Subscription,phonesupportandupgradesaresoldfor$3,600forayear.Theseitemswouldneedtobeallocatedbetweenthesubscription/upgradesandphonesupport.
AllocatingthePrice- Discounting
Ifthetransactionislessthanthesumofthestand-alonesellingprices,itshouldgenerallybespreadacrosstheitemsevenly.(Notethereareexceptionswhereyouwouldnot.)
Example:AnagreementwithInstallation,AnnualSubscription,phonesupportandupgradesissoldfor$4,800.Thesumofthestand-alonesellingpricesis$6,000.• The$1,200discountwouldbeevenlyspreadacrosstheitems.
Example:AnagreementwithInstallation,AnnualSubscription,phonesupportandupgradesissoldfor$4,800.Thesumofthestand-alonesellingpricesis$3,600.• Thisisnotexpectedtohappen,butifitoccursthe$1,200extrawouldbeevenlyspreadacrosstheitems.(Itmighthappenwithacustomerthatissmallerthanwhatisexpectedinthestand-aloneprice.)
CalltoAction/ToDoList
Whatyouneedtodoby12/31/17:• IdentifyallofyourPerformanceObligationsandhowyouwillrecognizetherevenue–includinghowyouwillgroupthem
• Determinehowyouwillallocatetheprice• Reviewyourstandardcontracts/TermsofServiceandmakesurethecontractisconsistentwithhowyouwanttotreattherevenue.
• Implementaprocessofpre-approvalorreviewofanycontractmodifications.• Contactyourauditor(oraconsultant)andreviewconclusions• Determinehowyouwillimplementthenewstandard,(starting1/1/18or1/1/19)usingfullretrospectiveormodifiedretrospectivemethod
PollingQuestion
ForSaaScompanyemployees,whatrevenuerecognitionchangepreparationstepshaveyoualreadycompleted?(Selectallthatapply)
q IdentifiedPerformanceObligationsq Determinedpriceallocationprocessq ReviewedcurrentcontractsandTermsofServiceq Determinedimplementationplanq Noneoftheabove/OrnotaSaaSCompany
SelectedFurtherReading
1.FASBCodificationASC6062.RSMRevenueRecognition:AWholeNewWorld– Jan2017,43pages
http://rsmus.com/what-we-do/services/assurance/revenue-recognition-a-whole-new-world.html
3.RSMChangestorevenuerecognitioninthetechnologyindustry– Jan2017,18pageshttp://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
4.KPMGRevenueforSoftwareandSaaS– March2017,648pageshttps://frv.kpmg.us/reference-library/2017/03/revenue-for-software-and-saas.html
5.EarlyAdopter:Workday– Form10-QdatedApril30,2017
NewRevenueRecognitionRules
Q&A
SteveSehyCaaS forSaaSCFOConsulting
www.linkedin.com/in/stevesehy
ChrisWeberSaaSOptics
Thankyouforjoiningus!
