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IFRS and recurring revenue recognition

photo auteur emmanuel pasquet

EMMANUEL PASQUET

Approx. reading : about 5 min

IFRS applied to "as-a-service" business: an increasing complexity!

The Software as a Service (SaaS) distribution model is growing and showing no signs of slowing down. In fact, according to Gartner, 2020 revenues reach $ 110.5 billion, compared to $ 94.8 billion forecast in 2019.

In a high-growth industry, companies are moving quickly to stay competitive – by introducing new offerings, adjusting their services to improve customer loyalty, and finding new sources of revenue.

As the SaaS delivery model matures, its business model evolves to meet customer demands and maintain profitability.

For example, a typical scenario for a growing SaaS provider is to provide a distinctive service offering to customers that will contain both standardized professional services and both customization possibilities to better meet specific customer needs.

Ultimately, SaaS publishers can reintegrate these “specific” developments into their offerings, as standard, thus reducing the level of personalized professional services provided by themselves or by the partners they have certified.

How to recognize these elements in an appropriate way in the constitution of the turnover?

The new revenue standards will impact everyone (IFRS 15 and IFRS 16, ASC606)

In the context of recurring as-a-service business models, many questions arise for finance departments.

For example :

  • What is the date from which the contract must be booked? in principle, this is the date from which the parties are bound by their reciprocal commitments. But what exactly about a recurring commitment that combines products and services over the long term?
  • What are the conditional components of turnover: that is, these components indexed to a variable and generated at a future date. These variable components can be positive (bonus, success premium, rights not exercised by customers) or negative (discounts, tariff concession, right of return). How to avoid early recognition of income when the variable component is significant compared to the actual value of the contract?
  • How do you proceed with the allocation of income when the components of the contract involve products and services and, although distinct from each other, do not have an observable or historical selling price? It is therefore necessary to use estimation techniques, such as "cost plus" or a residual allocation method based on metrics that it is essential to document. But what work in perspective!

The regulator adds to the confusion in its last conclusions back to November 2019!

Nothing is ever easy in the world of accounting and financial standardization!

In its study report of November 2019, the european regulator confirms that according to it, standard IFRS 16 “Leases” does not apply to a customer’s right of access to the software of the provider hosted in the cloud, because this contract does not confer a right to control the use of the underlying asset but only a right to receive access.

However, the regulator does not appear to support a possible exemption from the scope of IFRS 16 for SaaS publishers. Doubt therefore remains as to how the income should be recognized.

Indeed, the regulator notes that it is also not permissible to fully rely on IAS 38 which was published to deal with intangible assets such as development costs, brands and licenses. This IAS38 standard may not be applied appropriately to emerging transactions in a digital economy, including without being exhaustive SAAS (Software as a Service) and every “as-a-service” model as a whole, crypto-assets and blockchains …

The regulator therefore considers that it would be useful to consider an update of IAS 38 as part of a specific standardization project. In other words, we are only at the beginning of the story.

SaaS and IFRS, a suitable management solution is imperative

Faced with an absence of secure and explicit rules, finance departments must guard against unpleasant surprises. The management tool is your best ally in these circumstances, as is listening to the publisher.

Be careful, however, accounting compliance should not overshadow the essential: income development.

More than just a puzzle for your finance department, upcoming changes to revenue standards have the potential to have a big impact on sales, marketing and pricing strategies, especially for companies with sales are based on subscriptions.

SaaS publishers, and more generally companies with subscription offerings, must take a close look at how they develop their business, define their pricing and sales policies and what they need to meet the new standards relating to the constitution of turnover.

Dotsha delivers a subscription management platform that is designed to simplify and automate the management of every “as-a-service model”. The platform automates your recurring billing and can help your business doing its revenue recognition and revenue accounting work more smoothly.

To learn more about us and understand how we can help you, please feel free to contact our customer support team and request a product demo.

About DOTSHA

Dotsha delivers the first subscription-to-cash automation platform designed to put every subscription-based or usage-based business on autopilot … from early subscription to cash collection!  

Your business can scale fast without turning its back-office into a mess! 

Keep growing faster… we’ve got your back !

All-In-One platform that unify {Pricing}+{Check-in}+{Billing}+{Payments}+{Dunning}+{Reporting} while the MRR just keeps growing, Dotsha’s plaform is an easy to use and quickly implemented cloud-based platform that augment your existing information system with robust API integrations in order to deliver optimal automation with minimal contribution. You will forget we are there!

photo auteur emmanuel pasquet

EMMANUEL PASQUET

Approx. reading : about 5 min

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