Auditing the SaaS Revenue Cycle

Transcription

1 Auditing the SaaS Revenue Cycle (or preparing your SaaS company for an audit) Presented by: Steve Sehy, CaaS for SaaS Moderator: Clayton Whitfield, SaaSOptics February 15, 2017

2 Welcome 30 seconds about us Product provides both: SaaS Financials SaaS Metrics Customers have collectively raised ~$2B in VC and PE Untold hours of due diligence and audit scrutiny

3 Steve Sehy, CaaS for SaaS CFO consulting providing CFO services to SaaS companies Started career in Software Development Moved to Product Management and Product Development Management Auditor at RSM (previously McGladrey) Find Steve on LinkedIn or at

4 Polling Question Which type of company are you representing? (Select one) qauditing firm qsaas/subscription Company qoutsourced accounting/cfo firm with SaaS Clients qother

5 Why We re Here SaaS Company Accountants/Management: To help you to complete the revenue cycle portion of an audit (or due diligence review), or to be audit ready even if you won t be audited this year Auditors: To help you to complete the revenue cycle portion of a SaaS (Software as a Service) company audit

6 Agenda SaaS Revenue Accounting Preparing for a Revenue Audit Getting Through Revenue Audit Fieldwork Q&A

7 Polling Question Which title best describes your current role? (Select one) qauditor qceo/cfo qvp of Finance qcontroller qother

8 SaaS Revenue Accounting For a SaaS company, the revenue cycle usually includes the following accounts: Revenue SaaS Subscriptions, Training, Setup, Implementation, Other Liability Deferred Revenue (billed revenue that has not yet been earned) Asset Unbilled Accrued Revenue (this is the inverse of deferred revenue) Asset Accounts Receivable

9 SaaS Revenue Accounting Financial Reporting The Company recognizes revenue as follows within the income statements: Nonrecurring revenue Setup services Training services Other income Consulting hours, Misc. Recurring revenue Subscriptions

10 Polling Question What type of SaaS revenue is most important to investors and financial analysts? qrecurring revenue qnonrecurring revenue

11 SaaS Revenue Accounting Revenue Accounting Methods Cash: When cash is received Invoiced/Billed: When client is billed GAAP (Generally Accepted Accounting Principles): When service is performed. This is what audited financials must use and what Series A investors are looking for.

12 SaaS Revenue Accounting SaaS On-Site Training Revenue GAAP - When service is performed Training Revenue [On Site] Training is sold both on a standalone basis and in initial bundled arrangements. Accordingly, the training is accounted for as a separate unit of accounting. Training revenue is recognized in the month that the training occurs. Process is key. You need to track invoiced vs. delivered dates. Period end adjustment can be used to book the GAAP amount.

13 SaaS Revenue Accounting SaaS Setup Revenue GAAP - When service is performed Allocated over the period of the contract or the expected life of the customer Service vs. Fee Too complicated for bullets (so listen closely) Setup Fee Revenue Policy This type of revenue is treated differently based on the specific circumstances. Your CFO and auditor will need to review this closely to come up with the appropriate GAAP treatment.

14 SaaS Revenue Accounting SaaS Subscription Revenue GAAP - When service is performed Spread out over the agreement period Subscription Revenue Policy Revenue is allocated over the period of the agreement

15 SaaS Revenue Accounting SaaS Subscription Agreements Monthly Quarterly Annually Multi-year

16 Polling Question For SaaS company employees: what type(s) of agreements does your company use? (Select all that apply) q Monthly q Quarterly q Annually q Multi-year q Other

17 SaaS Revenue Accounting SaaS Subscription Revenue Monthly Agreements Example: Monthly Contract for $1,000 per month for 12 months is signed on February 12 th The invoice is sent out on March 3 rd, with an April 1 st due date for the first monthly amount Client pays on April 10 th ; service starts on July 1 st GAAP Revenue of $1,000 will be recognized in each month from July to June Revenue will be exactly $1,000 for each month

18 SaaS Revenue Accounting SaaS Subscription Revenue Annual Agreements Forms of subscription revenue are allocated evenly over the contract period, starting with the contract start date Contract start dates are set as the first of the month, or on the date determined in the agreement Discounts on various forms of subscription revenue are at the discretion of management and have not been utilized in any significant manner to date Monthly amounts in annual agreements are computed using the exact days method, or another method if exact days is not used

19 SaaS Revenue Accounting SaaS Subscription Revenue Annual Agreements Example: Annual Contract for $12,000 is signed on February 12 th The invoice is sent out on March 3 rd, with an April 1 st due date for the full amount Client pays on April 10 th ; service starts on July 1 st Revenue of approximately $1,000 will be recognized in each month from July to June Revenue per month is computed using the exact days (e.g. January revenue is computed as 31 days / 365 days per year * $12,000 annual fee = $1,019.18) Therefore, revenue will change slightly from month to month based on the number of days

20 SaaS Revenue Accounting SaaS Subscription Revenue Multi-year Agreements The agreement text is key. A one-year agreement with option to renew may or may not be a multi-year agreement. Example 1: Two-year contract for $24,000 is signed on February 12 th The invoice is sent out on March 3 rd, with an April 1 st due date for the full amount Client pays on April 10 th ; service starts on July 1 st Revenue of approximately $1,000 will be recognized in each month from July to June Revenue per month is computed using the exact days (e.g. January revenue is computed as 31 days / 365*2 days per agreement * $24,000 fee = $1,019.18)

21 SaaS Revenue Accounting SaaS Subscription Revenue Multi-year Agreements Example 2: Two-year contract for $24,000 is signed on February 12 th (first year is $10,000; the second year is $14,000) The invoice is sent out on March 3 rd with an April 1st due date for the full amount Client pays on April 10 th ; service starts on July 1 st Revenue of approximately $1,000 will be recognized in each month from July to June Revenue per month is computed using the exact days (e.g. January revenue is computed as 31 days / 365*2 days per agreement * $24,000 fee = $1,019.18)

22 SaaS Revenue Accounting Multiple Element Arrangements When selling multiple products at once (e.g., subscription, installation and training) Relative selling price allocation policy When there is more than one unit of accounting, ASC 605 requires an allocation of the selling price between the different units of accounting. This is done by [put your conclusions here.] Example The standard one year subscription and startup training is contracted and invoiced by one sales person as $3,000 for the subscription and $2,000 for the training, but as $4,000 for the subscription and $1,000 for the training by another sales person. For GAAP revenue recognition purposes, these both need to be treated the same - your CFO and auditor should determine how to do this.

23 Polling Question If an annual contract for $2,400 is signed on July 12 th, the invoice is sent out on August 3 rd and is due September 1 st for the full amount. The client pays on August 10 th and service starts on October 1 st. How much revenue should be recognized for the year? A. Cash: $2,400 Invoiced: $2,400 GAAP: $2,400 B. Cash: $2,400 Invoiced: $2,400 GAAP: Approx. $600 C. Cash: $2,400 Invoiced: $2,400 GAAP: Approx. $400

24 SaaS Revenue Accounting Q&A

25 Preparing for an Audit Many SaaS companies are very young. This may be a first or second audit or only getting audit ready Auditors: Preparing client could be a service short of an audit Audit/Due Diligence: Many will wait on getting an audit until the bank or investors require it Being Audit Ready allows management to speak to GAAP revenue and other issues without having an audit performed If you are going for a Series A round of funding within the next 12 months, you should be audit ready (GAAP)

26 Preparing for an Audit What you need to do - before the audit: Revenue Recognition Policy Document Have your CFO prepare this document which is discussed with and approved by the auditor Since you should be recording your transactions in accordance with your policy, this process will let you review your current process and also get auditor approval that what you are doing is correct Your CFO and auditor must agree on this policy in order to be able to complete the audit

27 Preparing for an Audit What you need to do - before the audit: Provide your standard customer contract and any nonstandard customer contracts so that your CFO can discuss with the auditor how the contract impacts the way you are recording revenue

28 Preparing for an Audit What you need to do before the audit: Document your revenue cycle processes with a narrative that explains your process from customer order through delivery, billing and collection This may be different based on customer type or product Include a description of the software used for billing and for GAAP revenue calculations Include your policy for subscription periods (start on first of the month, start on date of invoice, start on.) Include your process for correcting errors or making changes to customer orders Include your process for computing and booking your GAAP revenue for subscriptions, training, etc.

29 Audit Fieldwork What you need to do before the audit fieldwork: Prepare a detailed report of: GAAP Revenue (invoice level) that agrees to the General Ledger account Accounts Receivable that agrees to the General Ledger account Deferred Revenue (invoice level) that agrees to the General Ledger account Unbilled Accrued Revenue (invoice level) that agrees to the General Ledger account. Provide: A standard contract All material contracts that are not standard Your Terms of Service

30 Audit Fieldwork What you need to do during the audit fieldwork: The auditors will want to see the backup for some of your revenue transactions. To get ready for this you should have systems in place that allow you to provide signed customer orders, signed customer contracts, proof of payment and proof of deposit when requested. They may then recalculate the GAAP revenue and agree it to your reports. To re-perform the monthly revenue calculation if the exact days method is used to compute revenue, use the following formula: Annual license fee * number of days in month / 365 To re-perform the annual revenue calculation if the exact days method is used to compute revenue, use the following formula: Annual license fee * number of subscription days in year / 365

31 Audit Fieldwork What you need to do during the audit fieldwork: The auditor may also want to verify revenue and or accounts receivable amounts and agreements with customers. They will have you prepare confirmation letters to be sent to some of your customers.

32 Polling Question For SaaS company employees, what audit preparation steps have you already completed? (Select all that apply) q System in place to record and report on GAAP revenue q Revenue recognition policies written up q Standard and non-standard agreements reviewed and agreed to revenue recording q Revenue cycle narrative written q None of the above

33 SaaS Revenue Audit Q&A

34 Auditing the SaaS Revenue Cycle Thank you for joining us! Steve Sehy CaaS for SaaS Clayton Whitfield SaaSOptics