The Ultimate Guide to SaaS Revenue Recognition

What is Revenue Recognition? Revenue Recognition is the process of converting cash from ‘bookings’ into ‘revenue’. There are two types of revenue recognition, ased on the timing of when the sale is recorded in your accounts.

Cash-basis accounting: recognizes revenue and expenses when cash is received or paid. It is often used by small businesses and entrepreneurs with less or no inventory.

Accrual accounting. Revenues and expenses are recorded when they are earned, regardless of when the cash actually comes in or when expenses are incurred. It suits subscription businesses it actually tracks the MRR.

The Importance of Accounting Standards.

• Eliminate variations in the way businesses across industries handle accounting for similar transactions by bringing standardization and transparency in financial reporting across companies and industries.
• Make it easy for investors and stakeholders to comprehend and compare the financial statements across companies and industries.

ASC 606 & Revenue Recognition in the World of SaaS.  ASC 606 simplifies the preparation of financial statements through a SaaS-friendly 5 Step Model for Revenue Recognition. (Identify the contract, Identify the performance obligation, Determine the transaction price, Allocate the transaction price, Recognize revenue)

What Does ASC 606 Mean for SaaS Companies? ASC 606’s overarching framework covers all bases for SaaS revenue recognition.

Key Challenges of SaaS Revenue Recognition. For annual plans, revenue recognition is straightforward. But the complexity gradually increases with subscription scenarios (the customer cancels the subscription mid-way, they upgrade from a monthly plan to an annual plan in the middle of the year, etc.).

Revenue Recognition Scenarios for SaaS Companies.

• Annual Plan
• Plan-based Upgrades
• Quantity-based Upgrades
• Plan-based Downgrades
• Quantity-based Downgrades
• Cancellation with Refund
• Cancellation without Refund
• Shift in Monthly to Annual Plan Cycle
• Shift in Annual to Monthly Plan Cycle
• Addons and Metered Billing
• Bad Debts and Write-Offs
• Partial write-off
• Full write-off

Revenue Recognition: Key Metrics to Track. Getting revenue recognition right also depends largely on the metrics that are used to keep track of the business, for example, bookings, billings, revenue, MRR & ARR.

Making SaaS Revenue Recognition Easy. Recurring billing and revenue recognition should go hand in hand.

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