Subject Revenue Recognition Memo - SaaS Software Services under ASC 606

Date: [Insert Date]

To[Insert Recipient's Name] From: [Insert Your Name] CC[Insert CC Names, if applicable] Subject: Accounting Treatment for Revenue Recognition of SaaS Software Services

This memo outlines the accounting principles for recognizing revenue from SaaS (Software as a Service) software services in accordance with ASC 606, "Revenue from Contracts with Customers."

1. Identify the Contract with the Customer

2. Analyze agreements to confirm the existence of a contract, including consideration, mutual obligations, and commercial substance.

3. Identify Performance Obligations

4. Determine distinct goods or services within the contract, which in SaaS often means access to the software and related support services.

5. Determine Transaction Price

6. Allocate the total contract price to each performance obligation based on standalone selling prices (SSPs), considering discounts, variable considerations, and noncash considerations.

7. Apply the Revenue Recognition Criteria

8. Recognize revenue when (or as) control transfers to the customer.

9. For SaaS, this typically occurs over time as the customer simultaneously receives and consumes the benefits of the service.

10. Use one of the following methods to measure progress:

    • Input MethodBased on the amount of service provided relative to the total expected service (e.g., hours used, users activated).
    • Output Method: Based on the value to the customer (e.g., milestones achieved, customer satisfaction).

11. Recognize Variable Consideration

12. Estimate and include variable consideration in the transaction price, subject to constraint, if it is highly probable that there will not be a significant reversal in the amount of cumulative revenue recognized.

13. Assess Contract Modifications

14. Evaluate changes in contracts, adjusting the transaction price and allocation of performance obligations, if necessary.

15. Disclose相关信息

16. Provide disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

In conclusion, SaaS companies should apply the five-step model outlined in ASC 606 to recognize revenue from their subscription-based services. It is crucial to maintain robust internal controls and documentation to support the revenue recognition process.

Please reach out if you have any questions or require further clarification.

[Your Name] [Your Title/Position]