Recognizing Revenue in the Cloud

As an accountant with no prior experience in the cloud industry, I understand the pains and questions that arise when recognizing revenue. Cloud computing and the various cloud services is highly debatable in the accounting world. 

Cloud is a relatively new concept with many methods of delivery and revenue recognition varies depending on whether the offering is considered software as a service (SaaS) or infrastructure as a service (IaaS). IaaS is the lesser known of the two, but it is what Appcore offers its clients.  So I will discuss some tips for recognizing revenue for Infrastructure-as-a-service

4 Criteria for Revenue Recognition

There are four criteria put forth in SAB 104 that a cloud service provider must meet in order to recognize revenue.

1.     Persuasive evidence of an arrangement exists

a.     A signed contract or master service agreement will fulfill this criterion.

2.     Services have been rendered or delivery has occurred

a.     Product must be in a usable state by the buyer.

3.     The seller’s price is fixed or determinable

a.     Again, a signed contract or MSA will fulfill this criterion.

4.     Collectability is reasonably assured

Categorizing and Recording Revenue

After meeting the four criteria in the section above, it is time to split out the receivables and record the revenue.

  1. Identify the separate obligations in the contract – for example, cloud service provider “A” is bringing on a new white label. There will be a one time set up fee as well as a monthly software-licensing fee for a 12-month period included in the same contract. 
  2. Separate out the price of each obligation – Using our example from above, we will break out pricing for the set up fee and the monthly licensing fee. Let’s say the one time set up fee is $1,000, and the monthly software-licensing fee is $250.* (Note: Some providers may choose to include the set up fee in the 12 monthly installments while others may require the set up fee at time of contract signing.  It does not matter how this is structured for accrual based revenue recognition purposes)
  3. Record the revenue – finishing the example from above, revenue for the set up fee will be recognized at delivery of the product. Per the four criteria above, revenue cannot be recognized until the product is capable of being used by the buyer. The monthly licensing fee will be recognized on a monthly basis throughout the contract term, starting upon delivery.

For someone who does not know the “in’s and out’s” of cloud computing, it is very easy to label the company as offering SaaS instead of IaaS. Each cloud service provider varies in their go-to-market strategy and business model, so please consult your company’s tax advisors regarding a revenue recognition model specified for your business. I would also recommend that someone from the technical side as well as accounts meet with the tax advisor. This way you have all of your bases covered when recognizing revenue in the cloud.