by Jeffrey Werner
Thursday, June 03, 2010 09:20 AM
On May 25th, 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 first of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.
Question - Upfront Fees
What is your definition of an upfront fee? If a customer requires additional professional services to customize the SaaS but could actually use the SaaS based on the standard setup, is that defined as “setup fees” or “professional services?” The revenue treatment would be different if VSOE exists on the SaaS. If the services were deemed to be professional services, the revenue could be recognized as delivered. If they were deemed to be setup fees, revenue would be recognized ratably.
Response
Additional professional services that were not required to use the service but instead to enhance it for a specific customer could be considered an independent element.
The facts of the situation would determine this. For example, if the professional services were contracted for separately – several months after the service started and the initial contract was signed – then they would probably be accounted for as a separate element and recognized as provided.
If the professional services were an element of the original agreement, you would need to consider whether they were truly optional. If they are considered optional, you would move to separation and allocation to determine whether they have independent value and thus could be recognized separately. If not, they would be ratable with SaaS revenue.
The thing to remember is whether they are truly separate elements or just a way of pricing. In a true upfront fee, there is no option, and the cost is truly part of the cost-of-use.
You might want to discuss this with your auditors to understand where they draw the line on being independent or having a relationship to the expected customer relationship period.
* Click here to view this on-demand webcast in its entirety.
