UK Hosting Arrangements - Revenue Recognition

[LaraWilson]

Having spent some time now reviwing the scant guidance on how to reocgnise revenue for Software as a Service (and all the various options surrounding said service) I am looking to benchmark my understanding with any other accountants for Software companies out there who are up and running with this already or who are on the same slippery path of investigation as I am.

 

[Nic0207]

I work at a software company and we offer two options: clients can buy the software outright (they own it and host it) or they can buy it as a "software as a service" (we own it and host it). For the clients who buy the software and host it, we take the revenue for that immediately once the software has been customized and the client is using it. We charge an annual maintenance fee for support and upgrades but they don't have to buy that and they still can use the software forever if they want. We take the annual fees over the course of the year (1/12 per month).

For the customers who buy it as a SaaS, we take the revenue over 36 months once the customization is done and the customer is using it. After it has gone live, any other customizations they want are also taken over 36 months. The only time we take the revenue immediately is if the price we charge is under our materiality threshold of $5K. We also charge annual subscription fees that we take over the course of the year. This treatment has been blessed by our auditors but I can't quote you the specific accounting rule that this falls under.

 

[LaraWilson]

Thanks for that, my interpretation of the information I can find is in line with what you are saying.

Is the 36 month time period you are using that as detailed in the contract?

 

[Nic0207]

No, the 36 months is not in the contract. It is assumed that the software has a useful life of about 3 years before it becomes obsolete, so we use 36 months to recognize the revenue over its useful life. Some of our contracts are only for one year. In other words, we sell two things - the initial license and then the annual maintenance/hosting subscription. The initial license is the part we take over 36 months (we generally customize the software somewhat) and the annual subscription for hosting/updates/etc. is taken over 12 months. I'm in the US though so not sure about this in the UK.