On May 25^th, Tensoft hosted a webcast^* with Silicon Valley software revenue recognition expert Jeffrey Werner entitled: Revenue Recognition Accounting for Software as a Service (SaaS). This is the third of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.

Question - Monthly User Fees

Have you come across monthly service fees based on a per-user/per-month price, but with a minimum monthly commitment which the customer has to pay?  I was wondering when the actual monthly usage is less than the minimum monthly amount and whether the difference should be deferred and recognized once the minimum is being reported, because the earnings process is only complete up to actual usage.  In a simple example – price per user per month: $1.00 and minimum monthly commitment: $10,000, which the customer must pay.  If in month 1 the customer only reports $7,500 (7,500 users) should we recognize the $10,000 or only $7,500?  In this example, the minimum monthly commitment is non-cancellable and non-refundable.

Response

The answer to your situation could depend on the contract language. 

If the contract specifies that if the minimum is not reached there is no recovery in future periods of the difference, then it would probably be appropriate to recognize the minimum each month. There would be no carry over or credit in following months when the minimum was exceeded.

If the contract allows credits or carryovers to future or prior periods for less than minimum usage, then the lower amount based on actual usage should be recognized.

^* Click here to view this on-demand webcast in its entirety.