Revenue Recognition Guide

REVENUE RECOGNITION PHILOSOPHY

Understanding Revenue Recognition as Foundation of Trust

REVENUE RECOGNITION FUNDAMENTALS

WHY REVENUE RECOGNITION MATTERS:
☐ Foundation of financial credibility
☐ Required for audit and compliance
☐ Affects investor and board confidence
☐ Impacts valuation and fundraising
☐ Legal requirement (SEC, GAAP)

CEO'S ROLE IN REVENUE RECOGNITION:
☐ Understand the principles (not every detail)
☐ Ensure finance team has proper training
☐ Review significant judgments
☐ Set tone for conservative/appropriate treatment
☐ Never pressure aggressive recognition

THE REVENUE RECOGNITION REALITY:
"Revenue recognition isn't about
maximizing reported revenue. It's about
accurately reflecting when you've earned
the right to recognize that revenue."

COMMON REVENUE RECOGNITION MISTAKES:
☐ Recognizing before delivery
☐ Ignoring multi-element arrangements
☐ Not updating for contract changes
☐ Inconsistent policies
☐ Poor documentation

KEY CONCEPTS:
Revenue vs. Cash: Revenue recognized when earned
Deferred Revenue: Cash received, not yet earned
Unbilled Revenue: Earned, not yet invoiced
Booking vs. Revenue: Contract signed vs. recognized

ASC 606 CORE PRINCIPLE:
"Recognize revenue to depict the transfer of
promised goods or services to customers in an
amount that reflects the consideration to which
the entity expects to be entitled."

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COMPREHENSIVE REVENUE RECOGNITION FRAMEWORK

ASC 606 Five-Step Model

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REVENUE RECOGNITION GUIDE (ASC 606)
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COMPANY: _______________
Fiscal Year: _______________
Last Policy Update: _______________

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THE FIVE-STEP MODEL
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STEP 1 - IDENTIFY THE CONTRACT
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A contract exists when ALL criteria are met:

☐ 1.1 Approval and commitment
   - Contract signed by both parties
   - Parties committed to obligations

☐ 1.2 Rights identifiable
   - Customer's rights to goods/services clear
   - Payment terms specified

☐ 1.3 Payment terms identifiable
   - Amount, timing, method defined
   - Variable consideration estimated

☐ 1.4 Commercial substance
   - Transaction has economic purpose
   - Risk/timing/amount of cash flows will change

☐ 1.5 Collection probable
   - Customer has ability and intent to pay
   - Credit assessment performed

CONTRACT COMBINATION:
☐ Review if multiple contracts should combine
☐ Negotiated as single package?
☐ Consideration depends on other contract?
☐ Single performance obligation across contracts?

STEP 2 - IDENTIFY PERFORMANCE OBLIGATIONS
─────────────────────────────────────
A performance obligation is a promise to transfer:
- A distinct good or service
- A series of distinct goods/services

DISTINCTNESS TEST:
☐ 2.1 Customer benefits from item alone (or with
   readily available resources)
☐ 2.2 Promise is separately identifiable from
   other promises in the contract

COMMON SAAS PERFORMANCE OBLIGATIONS:
| Obligation | Typically Distinct? | Notes |
|------------|---------------------|-------|
| Software subscription | Yes | Core obligation |
| Implementation | Often No | Often not distinct |
| Training | Sometimes | If can be used separately |
| Support | Sometimes | If goes beyond subscription |
| Professional services | Usually Yes | If distinct scope |
| Custom development | Depends | Evaluate integration |

STEP 3 - DETERMINE TRANSACTION PRICE
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Transaction price = amount entity expects to receive

COMPONENTS:
☐ 3.1 Fixed consideration: $_____________
☐ 3.2 Variable consideration: $_____________
   ☐ Usage-based fees
   ☐ Performance bonuses
   ☐ Discounts/rebates
   ☐ Right of return

☐ 3.3 Constraining variable consideration
   ☐ Estimate using expected value or most likely
   ☐ Include only amount highly probable to not reverse

☐ 3.4 Significant financing component
   ☐ If payment >12 months from delivery, evaluate
   ☐ Practical expedient: ignore if <1 year

☐ 3.5 Noncash consideration
   ☐ Fair value at contract inception

☐ 3.6 Consideration payable to customer
   ☐ Reduce transaction price unless distinct good/service

TOTAL TRANSACTION PRICE: $_____________

STEP 4 - ALLOCATE TRANSACTION PRICE
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Allocate based on relative standalone selling prices (SSP)

SSP DETERMINATION METHODS:
☐ 4.1 Observable price (if sold separately)
☐ 4.2 Adjusted market assessment (market prices)
☐ 4.3 Expected cost plus margin
☐ 4.4 Residual approach (limited circumstances)

ALLOCATION WORKSHEET:
| Obligation | SSP | Relative % | Allocated |
|------------|-----|------------|-----------|
| Subscription | $_____ | ___% | $_____ |
| Implementation | $_____ | ___% | $_____ |
| Support | $_____ | ___% | $_____ |
| Services | $_____ | ___% | $_____ |
| **Total** | $_____ | 100% | $_____ |

STEP 5 - RECOGNIZE REVENUE
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Recognize when (or as) performance obligation satisfied

OVER TIME RECOGNITION (if any criteria met):
☐ 5.1 Customer receives and consumes benefits
   simultaneously (most SaaS subscriptions)
☐ 5.2 Company's performance creates/enhances
   asset customer controls
☐ 5.3 Performance creates asset with no alternative
   use + right to payment for performance to date

POINT IN TIME RECOGNITION:
☐ None of the over-time criteria met
☐ Consider transfer of control indicators:
   - Customer has legal title
   - Customer has physical possession
   - Customer has risks and rewards
   - Customer has accepted the asset

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SAAS-SPECIFIC GUIDANCE
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SUBSCRIPTION REVENUE:
Recognition: Ratably over subscription term
Timing: Daily/monthly proration
Start: When customer can access software
End: Contract end or termination

Example calculation:
Annual subscription: $12,000
Contract term: 12 months
Monthly recognition: $1,000
Daily recognition: $32.88 (assumes 365 days)

IMPLEMENTATION/SETUP FEES:
☐ If distinct: Recognize when complete
☐ If not distinct: Combine with subscription,
   recognize ratably over contract term

Analysis:
☐ Can customer benefit from setup alone?
☐ Is setup integral to software benefit?
☐ Would third party provide similar service?

PROFESSIONAL SERVICES:
☐ Fixed price: Recognize over service period
   (milestones or % completion)
☐ Time & materials: Recognize as incurred

USAGE-BASED REVENUE:
Recognition: As customer uses/consumes
Measurement: End of usage period
Variable consideration: May need to estimate

CONTRACT MODIFICATIONS:
☐ Evaluate as separate contract if:
   - Additional distinct goods/services, AND
   - Price reflects standalone selling price
☐ Otherwise, modify existing contract:
   - Prospectively (not complete transfer yet)
   - Cumulative catch-up (already transferred)

Revenue Recognition Decision Tree

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REVENUE RECOGNITION DECISION TREE
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CONTRACT TYPE: _______________

IS IT A SINGLE PERFORMANCE OBLIGATION?
│
├─ YES → Recognize:
│         ├─ Over time if benefits transfer continuously
│         └─ Point in time if control transfers at once
│
└─ NO → Identify separate obligations
         │
         └─ For each obligation:
            │
            ├─ Determine SSP
            ├─ Allocate transaction price
            └─ Recognize per obligation timing

SUBSCRIPTION CONTRACTS:
Contract Date: _______________
Start Date: _______________
End Date: _______________
Total Value: $_____________

| Month | Days | Recognition | Cumulative |
|-------|------|-------------|------------|
| 1 | ___ | $_____ | $_____ |
| 2 | ___ | $_____ | $_____ |
| 3 | ___ | $_____ | $_____ |
| 4 | ___ | $_____ | $_____ |
| ... | | | |
| 12 | ___ | $_____ | $_____ |

Revenue Recognition Policy Documentation

Element	Policy	Documentation
Contract criteria	☐ Documented	☐ Yes ☐ No
Performance obligations	☐ Documented	☐ Yes ☐ No
SSP methodology	☐ Documented	☐ Yes ☐ No
Variable consideration	☐ Documented	☐ Yes ☐ No
Contract modifications	☐ Documented	☐ Yes ☐ No
Disclosure requirements	☐ Documented	☐ Yes ☐ No

Contract Review Template

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CONTRACT REVENUE ANALYSIS
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CONTRACT: _______________
Customer: _______________
Contract Date: _______________
Total Contract Value: $_____________

PERFORMANCE OBLIGATIONS IDENTIFIED:
| # | Obligation | Distinct? | SSP | Allocated | Timing |
|---|------------|-----------|-----|-----------|--------|
| 1 | | ☐ Y ☐ N | $_____ | $_____ | |
| 2 | | ☐ Y ☐ N | $_____ | $_____ | |
| 3 | | ☐ Y ☐ N | $_____ | $_____ | |
| 4 | | ☐ Y ☐ N | $_____ | $_____ | |
| **Total** | | | $_____ | $_____ | |

REVENUE SCHEDULE:
| Period | Obligation 1 | Obligation 2 | Total | Deferred |
|--------|--------------|--------------|-------|----------|
| Month 1 | $_____ | $_____ | $_____ | $_____ |
| Month 2 | $_____ | $_____ | $_____ | $_____ |
| Month 3 | $_____ | $_____ | $_____ | $_____ |
| ... | | | | |

MODIFICATION TRACKING:
☐ Original contract terms
☐ Amendment 1: ______ (date: ______)
☐ Amendment 2: ______ (date: ______)

DOCUMENTATION CHECKLIST:
☐ Signed contract on file
☐ SSP documentation
☐ Revenue schedule created
☐ System set up correctly
☐ Reviewed by accounting

Common Revenue Recognition Issues

Issue	Question	Resolution
Implementation fees	Distinct or combined?	Usually combined if required
Multi-year discounts	Allocate or straight-line?	Allocate per SSP
Usage true-ups	When to recognize?	As usage occurs
Termination credits	Reduce revenue?	Yes, when provided
Free periods	How to treat?	Part of total consideration

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