ASC 606: SaaS Revenue Recognition in Five Steps

ASC 606 is an update to previous guidelines defined in ASC 605, and came into effect between 2018 and 2019. They are usually recorded over a period, usually monthly or for the whole year. Although we’ve talked about cash accounting before, here’s a brief summary of cash vs. accrual accounting, and why it might be better for your SaaS company to use accrual accounting as soon as you have the capacity to do so. SaaS products need to have a strong hold on their data as their business changes rapidly month-to-month. Using specific business metrics tools for SaaS is a must when running your SaaS accounting.

SaaS accounting refers to recording, analyzing, and interpreting the financial information of your SaaS business. Because of the complexity of accounting in SaaS, most SaaS businesses leverage cloud SaaS accounting software to manage their financial statements and reports. For instance, what metrics, standards, and procedures should you have in place?

Applying IFRSs in challenging situations

This can happen over a period of time or at once, depending on the nature of your contract. The delivery of a product or service can be recurring in the SaaS business model. And so, the total amount can be split as the revenue for each performance obligation. So, revenue recognition becomes convoluted as every company offers different subscription plans and pricing models based on the number of users, the volume of resources consumed, and the type of product/service being sold.

From determining contract term and assessing whether a software license is distinct to accounting for variable fees in a SaaS arrangement and much more, we hope to demystify the accounting and reporting implications. Subscription companies often get paid ahead of time for a service that will be delivered over the course of a year. We see many inexperienced bookkeepers recognize the full cash payment upfront as revenue instead of recognizing it over time. This can cause significant misstatement of ARR, and can not only make a founder incorrectly run their business, but can damage a VC fundraise. It’s important to note that most VCs only use recurring revenue growth in the calculation, ignoring non-recurring revenue or one-time earnings.

What Makes Accounting For SaaS Companies Different?

By adhering to GAAP US guidelines, SaaS companies can present accurate financial reports, build investor trust, and ultimately grow their businesses. Say your SaaS business sells a $120,000 contract that with a 12 month term in January, and the customer pays you right away. Because GAAP requires organized, consistent, and comparable financials, your forecasting financial modeling and analysis are more accurate and reliable. For SaaS businesses, which rely heavily on financial projections to inform important business investments and decisions, working with accurate and up-to-date financials is crucial. This condensed example from Snowflake shows how a non-GAAP SaaS P&L that you might use for internal reporting becomes a compliant income statement. Companies following GAAP are expected to apply the standards consistently across all reporting periods.

Three major considerations when working on SaaS accounting are bookings, billings, and revenue. Baremetrics plays a role in your SaaS accounting by providing you the metrics you need to fill out your statement sheets. A key component of any scaling business is a robust, forward-looking financial model. Many founders create a basic version of this, but working with experienced financial consultants to build out a much more comprehensive forecast is a vital step in your growth trajectory. So far, we’ve covered how ASC606 has streamlined the revenue reporting process for SaaS companies along with the others.

The Balance Sheet

These are the Profit & Loss Statement (AKA an Income Statement), Balance Sheet, and Cash Flow Statement. Let’s take a closer look at what’s involved in each of these financial reports. This is the price that the vendor is expected to receive from their customers after the transfer of all the goods and services as promised in the contract. The transaction price can be a fixed amount and other variables like price considerations, bonuses, rebates, penalties, etc.

We go through everything you need to set up subscription billing and accurately recognize recurring revenue. Although today’s revenue recognition guidance applies the same accounting model across all industries, there are a number of unique considerations when accounting for software and software-as-a-service (SaaS) arrangements. As you delve into these arrangements, we’ve developed a series of Q&As to help you navigate common issues that arise.

Accrual Accounting:

A double-entry method is when every business transaction makes an equal and opposite change in at least two different accounts. The matching principle means that revenues and their expenses must be recorded in the same period. This is an accounting guide for new startups and entrepreneurs looking for a well-rounded explanation of SaaS accounting.

• The majority of the time we onboard a new client at G-Squared Partners, our initial focus is typically on helping the business become GAAP compliant.
• These articles and related content is not a substitute for the guidance of a lawyer (and especially for questions related to GDPR), tax, or compliance professional.
• All scaling SaaS businesses need a tool which manages subscriptions & recurring billing on one hand, and streamlines finance operations on the other.
• By helping to transform complex revenue recognition from a convoluted and inconsistent process into a universally accepted methodology, ASC 606 provides a valuable framework for SaaS businesses—but there is still plenty of nuance.
• The IFRIC agenda decision issued in March 2021 relates to this third category SaaS.
• At its most basic level, if your clients are paying ahead of time for services, your company will put a deferred revenue liability onto the balance sheet.
• We believe that it’s our team’s job to help save our CEOs time and take care of the basic bookkeeping tasks that other services dump onto their clients.

As the economy begins to slow and investors guard their purse strings more tightly, it’s more important than ever for founders to closely manage the finances of their businesses. Doing so effectively demands an understanding of the intricacies of SaaS accounting. So, the financial boards took the matters into their own hands and called for the biggest change to the accounting standards in the last 100 years—ASC 606. All scaling SaaS companies need a specific tool that can manage subscription and recurring billing on the one hand and streamline financial reporting operations on the other.

SaaS accounting is a type of accounting specifically designed for software-as-a-service companies. This type of accounting takes into account the recurring revenue and subscription model of SaaS companies and provides financial statements specific to this type of business. Every company has some way to track income, expenses, assets, and liabilities. Due to their unique business model, SaaS companies will have some industry-specific variations in their accounting practices. Their financial statements will also have very different metrics and ratios than other online business types.

Our IFRS Viewpoint series provides insights from our global IFRS team on applying IFRSs in challenging situations. Each edition focuses on an area where the Standards have proved difficult to apply or lack guidance. Viewpoint is our online digital resource for the latest news, PwC guidance, webcasts, research materials and full text of the authoritative accounting… At any moment, executives or team members may own public or private stock in any of the third party companies we mention. We recommend using an existing financial model template as a base instead of starting from scratch. Once you have a template, incorporate your actual financial results into it to ground your projections in reality.

Recognizing Revenue as Performance Obligations Are Met

These companies also tend to take the same methods and principles used to maintain a traditional software business and implement them in the SaaS business. A mess of calculations that don’t accurately give insight into the state of the company. If you aren’t already working with a SaaS business in some capacity, the chances are high that you will soon. As an accounting professional, it is crucial to understand the differences in managing the operations and finances of a traditional software business versus those of a SaaS business. Chargebee is a recurring billing service that seamlessly accounts for revenue recognition. You can customize contracts with preset charges that automate accounting for items like add-ons, seats, upgrades, cancellations, tax rates, etc.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value.

SaaS Accounting Standards

Additionally, estimate other expenses, using benchmarks from successful companies if needed. At a high level, working capital is the difference between a company recognizes and expense or revenue and when it pays/collects the cash. Bookings is not actually defined by GAAP, so SaaS accountants don’t usually produce this metric out of the accounting system – instead, it is produced out saas accounting of a sales CRM like Salesforce or Hubspot. Every business needs a chart of accounts – we’ve got a sample chart of accounts for a SaaS company here for you to use if you’d like. Keep in mind that every business is unique – so you may want to modify it to fit your specific business. Kruze is trusted by hundreds of companies, and we understand the unique challenges startups face.