When someone bought a laptop a couple of years ago, chances are high that this person only had to pay a one-time fee to be able to download a particular software onto his or her laptop – think Adobe Photoshop or Microsoft Office. After this, they could often just simply use the software without having to pay for them again. Nowadays, most Software as a Service (SaaS) providers use a subscription-based model in which the customer pays a small monthly fee. Also, if the customer does not want to use this service anymore, they can simply notify the provider and quit paying the fee after the contract is up. (Quora, 2018)
This makes most things easier for customers, but what happens to the firms? Will they have to change their business model and will this affect their accounting part?
As most channel firms transformed from transactional product sales to the recurring revenue models, they often found it not an easy task to price their services. As subscription-based models are more complex in comparison to a specific margin mark-up on a hardware piece, firms often struggle on how to price their services. Moreover, the new Accounting Standards Codification 606 (ASC 606), which started in December 2017, has a great impact on the way firms recognize revenue. Revenue recognition is a historically inconsistent process across all the different firms and industries. (Caster, 2018) With the ASC 606, subscription-based software solutions, that do also offer other offerings such as security and maintenance, must be broken apart into separate individual transactions. Consequently, the ASC 606 is making revenue recognition calculations more and more complicated which could potentially require new systems to help with forecasting and processing. Although revenue recognition calculations will be more challenging, the ASC 606 has some great advantages as well such as the increased financial statement comparability across different companies and industries. (PWC, 2018)
References:
Caster, S. (2018). What is ASC 606 / IFRS 15 and How it Affects You. Retrieved 13 September 2018, from https://apttus.com/blog/what-is-asc-606-how-does-it-affect-you/
Comptia. (2018). It Industry Outlook 2018. Retrieved 13 September 2018, from https://www.comptia.org/resources/it-industry-trends-analysis
Pwc. (2018). Revenue Recognition. Retrieved 13 September 2018, from https://www.pwc.com/us/en/cfodirect/issues/revenue-recognition.html
Quora. (2018). The Pros And Cons Of Selling Your Software As A Subscription Service. Retrieved 13 September 2018, from https://www.forbes.com/sites/quora/2018/07/25/the-pros-and-cons-of-selling-your-software-as-a-subscription-service/#18fd4d7475fc
Very interesting article Luuk! I think Software as a Service will only become more prominent throughout the industry which makes clear accounting standards extremely important. Besides comparability across different companies and industries, the Accounting Standard Codification 606 will be valuable for financial analysts to consistently and accurately value firms. I agree with your statement that Software as a Service provides value to customers through security, maintenance and developments, however do you think subscription-based models do have downsides for the customers as well?