Set-up fees are common in SaaS arrangements. Some SaaS contracts require the customer to pay an upfront fee to set up the customer on the entity’s systems and processes. The fee is a nominal amount and is nonrefundable. The customer can renew the contract each year without paying an additional fee. The entity’s setup activities do not transfer a good or service to the customer and, therefore, do not give rise to a performance obligation. The entity concludes that the renewal option does not provide a material right to the customer that it would not receive without entering into that contract. The upfront fee is, in effect, an advance payment for the future transaction processing services.
Consequently, the entity determines the transaction price, which includes both the SaaS and the nonrefundable upfront fee, and recognizes revenue for the transaction processing services (combined SaaS and setup activities) as those services are provided. Some setup activities, such as data conversion services, are more substantive. They usually take place prior to the Go-Live date, the date when the customer first has use of the SaaS application.
ASC 606-10-25-19: A good or service that is promised to a customer is distinct if both of the following criteria are met: a. The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct). b. The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the good or service is distinct within the context of the contract).
The issue is whether the customer can benefit from the good or service either on its own, or together with other resources that are readily available. Let’s say that the Data Conversion Services are performed in month 1, nothing happens in month 2, and “Go Live” is in month 3, that is, the customer commences to use the SaaS subscription in month 3. Does the customer benefit from benefit from the service in month 1? Remember, even though the customer’s data has been converted, the customer cannot use the SaaS subscription until the “Go Live” date. On the other hand, the SaaS subscription, which is required in order for the customer to benefit from the data conversion, is a resource that is readily available. If we commence the data conversion services on, or after, the Go-Live date, the data conversion services will be treated as any implementation services and will recognized as performed. Commencing the data conversion services prior to Go-Live shifts the dates of revenue recognition but should not alter the method of revenue recognition.
ASC 606-25-23: An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
The customer cannot take control (benefit from) the data conversion services until the Go-Live date because the customer has no access to their converted data until then. Therefore, no revenue from the data conversion services can be recognized until the Go-Live date. At that point all of the revenue associated with the data conversion services to that point will be recognized.
One caveat; what happens if the customer cancels the contract prior to Go-Live? If your contract is cancelable, then no revenue recognize from data conversion services must be reversed as the data conversion services as the customer never obtains control of the data. The entity’s promise to transfer the service to the customer is separately identifiable from other promises in the contract.
Conclusion: The data conversion services are a performance obligation in the contract and revenue will be deferred over time as the data conversion services are performed, because the customer has no access to (benefit from) their converted data until the Go-Live date. All of the deferred revenue associated with the data conversion services will be recognized at the Go-Live date. Any remaining services will be recognized as performed because the customer will simultaneously receive and consume the benefits of the remaining data conversion as the entity performs the conversion.