Entity fs performance obligation to provide the hosting service is satisfied over time. Fasb issues proposed asu on cloud computing arrangements. Per our audit, for contracts that are true hosting arrangements i. Oct 30, 2017 i think i see a gaap in the clouds gaap and accounting for cloud computing arrangements oct 30, 2017 for generally accepted accounting principles gaap to remain relevant in todays business environment, the fasb must increasingly address new topics. 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. Here you will find the issues identified and further discussion. How revenue recognition changes are affecting preparers. Multiple element revenue arrangements a csp may provide its users with a number of different services. 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.
The new standards require, with some exceptions, the allocation of the transaction price to various performance obligations. Boeing reports that most of its defense, space, and security contracts will recognize revenue under the new standard under a costsincurred measurement method. May 08, 2020 generally accepted accounting principles, or gaap, refer to a set of u. The financial accounting standards boards fasb accounting standard on revenue recognition, fasb asu 201409, eliminates the transaction and industryspecific guidance under current u. Beyond the allocation of the transaction price, the timing of revenue recognition may change for many companies. Revenue recognition issues and topics for saas, subscription, and recurring. Revenue recognition and saas accounting for subscription. Generally accepted accounting principles gaap and international financial reporting standards ifrs. When a company issues and distributes their financial statements to the public, showing revenue recognition, balance sheet item classification and outstanding share measurements, gaap must be followed. Revenue recognition by reseller var for service contract. That may shift was the deliberation process continues. Aug 27, 20 to understand whether quickbooks is a proper solution for a software startup, we first need to determine what it means to be gaap compliant. This accounting spotlight discusses the identification of performance obligations under the new revenue standard the guidance in asu 201409, revenue from contracts with customers topic 606, as amended. Feb 07, 2017 the current gaap standards for cloud and saas software companies, sop 972 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for revenue recognition.
As a result, many public entities have now disclosed the impact of adopting asc 606 within their interim financial reports on form 10q. Accounting standard update asu 201409 topic 606, revenue. Understand, apply and update your knowledge of the changing practices of revenue recognition. Presently, gaap has complex, detailed, and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate.
We will explain the key trends and changes in accounting that companies have applied for 31 december 2018 year ends, including the timing and amount of revenue recognised, and the extra. Software companies often have arrangements with customers that include multiple components wrapped into one contract with a customer. If the binding relationship between reseller and client is 3 years and the contract between the reseller and the supplier is also 3 years i would then cash and revenue recognition is very different record my supply invoice as a prepaid cost under assets and then e. Those companies with software license revenue will be most affected, while there is likely a lesser impact on the recognition of softwareasaservice saas revenue. If not, the entire arrangement was a service arrangement. Is quickbooks gaapcompliant for software companies. Revenue recognition for saas and software companies deloitte. Accounting for cloud computing costs can be complex. How do i recognize revenue in my subscription business.
New revenue recognition standard means big changes for. How ifrs 15, the new revenue recognition standard or asc 606 for us gaap reporters, has impacted software companies revenue recognition in practice. Revenue recognition is the key focus of the new asc 606 standard, which determine the specific conditions under which income becomes realized as revenue. The proposed asu, which is a result of a consensus reached by the fasbs emerging issues task force eitf, would also add certain. The financial accounting standards boards fasbs new revenue recognition. There are also new guidelines on training, upgrades, multiyear pricing, etc. This new revenue recognition standard will be taking effect in 2018 for public companies and in 2019 for private companies. The financial accounting standards board fasb recently issued final guidance on accounting for licenses of intellectual property and identifying performance obligations in its new revenue recognition standard. Sep 11, 2018 a customers accounting for implementation costs in a cca that is a service contract. The current gaap standards for cloud and saas software companies, sop 972 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for revenue recognition. Identifying performance obligations and licensing, which was issued on april 14. What follows is a summary of the current accounting guidance. Regulations new revenue recognition standard means big changes for software companies.
For operators, when accounting for revenue generated for cloud services. Regulations new revenue recognition rule is tricky for software and technology companies. Under current gaap, recognition takes place as deliveries are made or. Fasb issues guidance on licensing and performance obligations. The end user does not manage or control the cloud infrastructure or application capabilities, nor are they responsible for upgrades to the underlying systems and software. Current gaap precludes immediate revenue recognition when a software licensor provides a customer with extended payment terms beyond 12 months or otherwise normal business practices. Software revenue recognition has not gotten easier. The impact of the new revenue recognition guidance on. Figure 1how the service models compare to typical packaged software. Mar 22, 2016 regulations new revenue recognition standard means big changes for software companies. Particularly in software hosting arrangements, which jacqueline will talk about. Multipledeliverable revenue arrangements a consensus of the fasb emerging issues task force, as further described below. Implementing the new revenue guidance in the technology. As a result, different industries use different accounting for economically similar transactions.
Revenue recognition for saas businesses is inherently complex, and depends on your specific revenue model. The impact of the new revenue recognition guidance on cloud. The new standard not only changes financial statement disclosures but also the way your. The publication explains that an entity applying the new revenue standard is required to identify a performance obligation by determining whether a promised good or service is 1. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and softwarerelated transactions. New revenue recognition rules for saas asc 606 saas. New revenue recognition rules for saas asc 606 october 5, 2017. If the proposal is finalized, the revenue recognition standard will take effect in 2018 for calendar yearend public entities. The new standard is aimed at reducing or eliminating those inconsistencies, thus improving comparability, and eliminating gaps in guidance. 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 softwareasaservice saas sectors, using insights and perspectives learned in the past year as public software and saas companies have finished their implementation and begun disclosing the effects on. 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. Revenue recognition is a generally accepted accounting principle gaap and a fundamental aspect of the accrual basis of saas accounting. Revenue must, according to gaap, meet certain standards before it can.
The financial accounting standards board fasb recently issued final guidance on accounting for licenses of intellectual property and identifying performance obligations in its new revenue recognition standard accounting standards update asu no. There is much nuance in software revenue accounting which will be addressed in future posts. With fasbs recent adoption of accounting standards codification. To understand whether quickbooks is a proper solution for a software startup, we first need to determine what it means to be gaap compliant.
The new revenue standards represent a significant transition away from softwarespecific, rulesdriven, revenue recognition to principlebased guidance. Until then we have asc 985605 to guide us through software revenue recognition. 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. The amendments in this update do not affect software revenue arrangements that do not include tangible products. A new global standard on revenue what this means for the software and cloud services industries the international accounting standards board iasb, along with the fasb in the us, have finally issued their new standard on revenue ifrs 15 revenue from contracts with customers asu 201409 or topic 606 in the us. In our experience, most cloud computing arrangements were accounted for as service contracts under legacy us gaap. 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 softwareasaservice saas sectors, using insights and perspectives learned in the past year as public. Sep 17, 2019 consideration allocated to product x i. New revenue recognition rules for saas asc 606 saas capital. She is also one of the national directors of grant thorntons u.
Software as a service saas saas is a software distribution model that allows users to access applications or programs via the internet. Simply put, it applies when software is licensed, sold. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. Gaap, on the other hand, has highly specific rules and procedures codified for a huge variety of. The guidance is already in effect for public companies.
As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. The software entities revenue recognition task force has been created to address issues which may arise due to fasbs new revenue recognition standard. Accounting for cloud computing fees and implementation costs may differ under ifrs and us gaap. In addition to her public accounting experience, lynne previously worked with a large consulting firm providing us gaap research and transaction support to company. This discussion is outside the scope of this paper. For software companies, asc 606 brings change, guesswork bi101. Accounting spotlight revenue recognition identifying. Under the prior revenue standard, software contracts that meet these criteria were accounted for under asc topic 985605, revenue recognitionsoftware. Implementing the new revenue guidance in the technology industry. Section 350 of the accounting standards codification covers software thats developed for internal use, while section 985 covers software thats developed for external use. This is covered in two entirely different parts of gaap. Under the new revenue guidelines, a company would have to consider whether theres implicit financing when extended payment terms are offered. On april 1, 2015, the fasb decided to propose a oneyear delay of the effective date for the new revenue recognition standard that it issued jointly with the iasb in 2014. Forget the industryspecific guidance youve used before and prepare to make.
Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas software companies will have to. The updated standard uses a different process to allocate the contract value and related discounts with the contract by eliminating the need to establish vendorspecific objective evidence vsoe, which. Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas. The complete guide to saas revenue recognition with asc 606. Customers face two accounting issues in relation to software as a service saas arrangements which ifrs, unlike us gaap, does not explicitly address the accounting for 1 fees paid to the saas provider and 2 related implementation costs. Regarding gaap revenue recognition, this is a set of standardized rules that deal with how and when revenue is recorded in organizational bookkeeping. A new global standard on revenue what this means for the software and cloud services industries the international accounting standards board iasb, along with the fasb in the us, have finally issued their new standard on revenue ifrs 15 revenue from contracts. This means that a company produces financial statements that comply with the historical cost principal, the matching principal, the revenue recognition principal, and the full disclosure principal. The financial accounting standards boards fasbs new revenue recognition standard asc 606 was effective for annual reporting periods beginning after december 15, 2017, for public entities. Gaap and accounting for cloud computing arrangements wipfli. Kpmg explains how the revenue standard asc 606 applies to software licensing and. Gaap compliant quickeasy bos business software for smes.
The complete guide to saas revenue recognition with asc. A customers accounting for implementation costs in a cca that is a service contract. If that is the case, the csp will have to determine how to allocate revenue among the various components. Generally accepted accounting principles, or gaap, refer to a set of u.
The revenue and cost recognition rules that different than the accounting rules that software licensing companies employ. 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. Apply the criteria of eitf 003 to determine whether sop 972 applies to the hosting arrangement. Under topic 606, an entity accounts for the performance obligations in the contract i.
New revenue recognition rule is tricky for software and. Gaap and replaces it with a principlesbased approach. For software companies, asc 606 brings change, guesswork. It is feasible for the customer to either run the software on its own. Kpmg explains how the revenue standard asc 606 applies to software licensing and saas arrangements. Jun 27, 2018 regulations new revenue recognition rule is tricky for software and technology companies. Asu 201815 aligns a customers accounting for implementation costs incurred in a cca that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internaluse software and hosting arrangements. Determination of whether significant costs are incurred in a hosting arrangement 30 2. A new global standard on revenue grant thornton ireland. Software topic 985 accounting standards codification.