When a SaaS company has a sale that results in orders that will not be fulfilled for 2 - 3 year (due to client roll out schedule), what is the best way to capture those sales but not inflate the bookings number and implementation backlog? One additional point to be aware of is that part of the commission is paid on booking so not paying commissions years in advance is another driver of not booking these sales right away. If you have solved this, it would be great to hear what you have done.
How to record future deals
Answers
Matt Jackson, the basic rules of revenue recognition are the following:
1. Prices are fixed and determinable
2. Evidence of an agreement exists
3. Collection is reasonably assured
4. Goods have been delivered, services have been rendered.
in limited number of circumstances
5. Conditional acceptance has been offered.
This is one of the few 'all or nothing' codifications in US GAAP, meaning if one of the 1-4 criteria is missing then the revenues are deferred until all are satisfied.
The rules become more convoluted under ASC 606 and 985-605 and ASU 2014-09. For a SAAS company, the most compelling driver to revenue recognition is when the SAAS environment has been accessed by the user. As these deals are set two years in the future, then rev rec is not an issue here per se.
To address your concerns:
1. When a SaaS company has a sale that results in orders that will not be fulfilled for 2 - 3 year (due to client roll out schedule), what is the best way to capture those sales but not inflate the bookings number and implementation backlog?
These future SAAS deals will not affect your backlog as no orders have been created nor will they affect your bookings as you do not have the right to invoice within the coming year. Your bookings should be based on the the term of the SAAS license as the trigger rather than the date of entry. I have done this with many software companies and bookings and backlog metrics are very very common (as you are well aware).
2. Part of the commission is paid on booking so not paying commissions years in advance is another driver of not booking these sales right away.
That strategy would certainly be consistent with the matching principle under US GAAP in addition to having a 'claw back' feature of some kind.
Are you working with a specific ERP system? Many of the revenue engines can easily accommodate these variables....thats probably more than you are looking for right now but it deserves mentioning.
Happy to help you with this in the future.
John
1
Thanks John.
The general approach I've used for SaaS revenue recognition is to book them to a deferred revenue liability account and let it sit there until service delivery starts. When the service delivery begins, I booked period revenue evenly across the periods of the agreement. I calculated it on a daily basis and booked it monthly. In this case, there was nothing irregular about the starts, like sites coming up on different periods. As I recall, there is a distinction if you offer a license for a customer to use on site/their own equipment. But, I think, in a pure SaaS model (i.e., no license option), the aforementioned was the most consistent method I found.
Similarly, I booked commissions according to how they were stipulated in agreements with the sales force. The revenue booking had little bearing on this. In our case, commissions were not payable until customer payment was received, so needing a clawback provision wasn't so important. But I agree with John that clawbacks may be important in your situation.
Matt,
It sounds as if you already received full payment for your future services, in which case indeed you should book that whole amount to the deferred revenue liability account, just like John Argo is advising, and start recognizing the monthly recurring revenue only when you start delivering the service. The only exception would be any implementation work you'd be delivering prior to the start date if that was included in the contract, for which you'd be recognizing the corresponding revenue at that time.
Now, if you didn't receive any advanced payment, then the contract is just that, a signed contract for future services. You could show it under the current year bookings, but like you said, that would tend to skew your sales goals and commissions for the year, and you'd still want to achieve those goals that were meant to translate into solid revenue for the current year, not 2-3 years down the line! So personally I would only show such contract under "future bookings" and not include it the current year's sales figures.
However, I would certainly include such future contracted revenue in the cash-flow projections for the years in reference, maybe with some probability factor attached to it in case a cancellation is still possible.
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