5 Step revenue recognition for SaaS accounting
GAAP regulated by the Financial Accounting Standards Board (FASB) and the IFRS, regulated by the International Accounting Standards Board (IASB) recognise revenue recognition as a core accounting principle. The FASB and the IASB issued a converged standard on revenue recognition [1] that specifies the circ*mstances under which you can recognise revenue and how you can record that revenue in financial statements.
GAAP’s Accounting Standards Codification 606 (ASC 606) [2] and IFRS 15 [3] is a converged SaaS revenue recognition standard developed by FASB and IASB to drive consistency in financial reporting. The principles of revenue recognition are the same across industries. ASC 606 and IFRS 15 revenue proposes a flexible, solid five-step structure for revenue recognition.
1. Identify revenue from contracts with customers
This document specifies the conditions you must meet before making a sales agreement with a client. This contract is an agreement between two or more parties that spell out their responsibilities and rights.
2. Identify performance obligations in your contract
When drafting a contract, you include all the specifics of deliverables and performance obligations here. If the services or products are distinct, you need to account for them separately.
3. Establish a transaction price
In this step, consider standalone fees, subscription service costs, and any discounts when determining the final transaction price.
4. Allocate your transaction price
This part outlines the breakdown of the transaction price between the various obligations described in the contract. These amounts may be subject to change.
5. Recognise revenue when meeting performance obligations
You will recognise revenue over time based on the customer experiencing the benefits of your product or service and the accompanying transfer of control from the seller to the buyer.
