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SaaS: How to Recognize Revenue

SaaS: How to Recognize Revenue

by Sanjeev Archak

The SaaS business model provides some interesting challenges to both businesses and accountants.The SaaS industry has several metrics to measure growth. There are terms like Monthly Recurring Revenue, Average Revenue Per User, Annual Contract Value, all these have revenue in common.But these may not have any accounting relevance.How to recognize revenue for a Saas company?

Lets us understand some of these terms:

Annual Contract Value(ACV)

ACV is the total value of the contract agreed with the customer. This contract can be for a year or more. This also called a “booking”. Some SaaS companies include one time implementation or customization fees into “booking”. 

Annual Recurring Revenue(ARR)

ARR is the Annual Recurring Revenue from your customers. This the revenue you’d collect in the coming 12 months if you don’t add or churn anything. 

Monthly Recurring Revenue (MRR)

This is the ARR divided by 12 or you could say ARR is MRR times 12.

These terms do not have any relevance under GAAP or India Accounting Standards. How does an accountant view these terms?

Here is an example with multiple contracts being signed and going live on different dates:

  1st Contract 2nd Contract 3rd Contract 4th Contract 5th Contract
Contract Signed 1-Apr-19 1-May-19 1-May-19 1-Jun-19 30-Jun-19
Go Live Date 1-May-19 1-Jun-19 1-Jul-19 1-June-19 01-Jul-19
Term 12 months 12 months 12 months 12 months 12 months
ACV          1,20,000            1,20,000          1,20,000          1,20,000          1,20,000

Among the above contracts, only of them will recognized for as ARR viz, Contract 4. The revenue on the other contracts will be recognized as seen below:

  April May June July
ACV Bookings          1,20,000          2,40,000    1,20,000                    –  
ARR Booking          1,20,000          2,40,000    1,20,000                    –  
MRR Booking             10,000             20,000       20,000                    –  
Recognized ARR                       –            1,20,000    3,60,000       6,00,000
Recognized MRR                       –               10,000       30,000          50,000

As the CEO of an Enterprise SaaS company, make sure you understand if you are talking bookings or recognized revenue. Your bookkeeper should be able to help you out if you have questions.

A good accountant will recognize revenue when it is due and will help the revenue curve for the company. Revenue numbers have a huge influence on founders and investors. Therefore, make sure your ARR and MRR numbers are correct. 

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