What is revenue recognition for SaaS?
Revenue recognition is the accounting process of matching earned income to the period in which services are delivered. It refers to the conversion of billed sales into income for accounting purposes. For SaaS companies, where customers often pay upfront for subscriptions, spreading this income over the contract term is essential for accurate financial reporting.
Unlike companies that sell a physical product, SaaS companies often don’t fully earn income the moment a customer pays. Revenue recognition rules make sure you don’t claim all that money right away. Instead, you spread the income across the whole subscription period. This way, your financial reports honestly show how much you’re actually earning each month, giving you a much clearer picture of your business health.
GAAP vs IFRS: understanding the standards
While revenue recognition principles are broadly the same worldwide, the specific rules can vary.
There are two main standards for revenue recognition globally: ASC 606 (Accounting Standards Codification Topic 606) under U.S. Generally Accepting Accounting Principles (GAAP) and IFRS 15 under International Financial Reporting Standards (IFRS).
As ASC 606 was a collaborative effort by the FASB and IASB to improve and align revenue recognition principles, the two sets of rules are closely related and tend to lead to very similar outcomes for most companies.
Both ASC 606 and IFRS 15 outline a similar five-step model for revenue recognition:
1. Identify the contract: A valid, legally binding contract must exist.
2. Identify performance obligations: Break down the contract into distinct promises of goods or services.
3. Determine the transaction price: Account for variable elements like discounts or bonuses.
4. Allocate the transaction price: Assign the value to each performance obligation.
5. Recognize revenue: Record revenue as each performance obligation is satisfied.
Key distinctions between ASC 606 and IFRS 15 include their handling of collectability thresholds, how they treat contract modifications, and the presentation of contract liabilities/assets. International companies must understand these nuances in order to ensure compliance with their relevant standards.
Challenges in SaaS revenue recognition
Keeping track of revenue recognition while managing a growing business with multiple contracts and customers can be tricky. Small businesses usually start with spreadsheets which allocate invoiced revenue on a line by line, invoice by invoice basis.
Does this sound familiar? Do you have a manual spreadsheet to track customer revenue and allocate it for accounting purposes? Do you use it to create manual journals in your accounting system?
Spreadsheets are great for flexibility, but they are time consuming and prone to errors.
If your business has more than one reporting entity, getting an overview of MRR and its relation to recognised revenue can be really tricky, especially if your business spans across multiple accounting systems or currencies.
Moreover, spreadsheets need to be manually linked to reporting of financials and key business metrics such as MRR (monthly recurring revenue), ARR (annual recurring revenue) customer churn, revenue retention, customer lifetime value, CAC (customer acquisition cost) and CAC payback.
In short, spreadsheets are a risky and inefficient way to manage revenue recognition.
Automation: the benefits of revenue recognition software
Manually managing revenue recognition for a SaaS company can be error-prone and time-consuming.
Revenue recognition software overcomes these challenges and streamlines the revenue recognition process. At its best, revenue recognition software enables efficient, precise, real-time revenue tracking through the use of such capabilities as automated data capture and text recognition capabilities.
Here’s how revenue recognition software helps:
Accuracy: Reduces errors compared to manual processes and spreadsheets.
Efficiency: Streamlines calculations, data entry, and journal posting. Saves time.
Compliance: Ensures practices aligned with regulations.
Scalability: Handles growth without overloading your finance team.
Real-time visibility: Provides up-to-date revenue tracking and, in many cases, real-time related SaaS metrics such as MRR.
Options for automating ASC 606 and IFRS 15 compliance
Several solutions cater to SaaS revenue recognition.
- ScaleXP: offers automated journal entries, contract management and text recognition capabilities for streamlined data capture. It also offers real time links to sophisticated, flexible financial and operational reporting including not just MRR but also other key SaaS KPIs.
- Flowrev: focuses on automated journals, but may lack flexibility for complex operations and doesn’t provide much in the way of management reporting.
- is a specialist in revenue and cost recognition software which provides automated accounting journals based on invoice data and customer provided rules; it is simple to use, but doesn’t provide a lot of flexibility or reporting and requires a lot of manual interface for large complex operations.
- Chargebee: specialises in billing rather than in-depth accounting compliance.
- Maxio: Prioritises contract management rather than accounting automation; highly flexible but can be costly and time consuming to implement.
Automate your revenue recognition with ScaleXP
ScaleXP stands out by addressing both accounting accuracy and operational efficiency. If you’re ready to transform your revenue recognition process, book a demo here.
