At a High Level

Software as a Service (“SaaS”) continues to rise in popularity, offering increases in speed, universal access, scalability, and security. SaaS is hosted on a company’s servers and accessed through a web browser, which stands in contrast to legacy on-premise software installed locally on the customer’s server and hardware. Many software companies, however, do not yet have the infrastructure or technology to support a SaaS offering. To solve for this, SaaS companies often provide customers the option to convert their current on-premise subscription contracts later in the contract term. This conversion option raises questions on when revenue should be recognized under the new revenue guidance in ASC 606.

The Financial Accounting Standards Board (FASB) added contract modifications—specifically addressing the conversion of a term software license to a SaaS Arangement—as a discussion point in the Emerging Issues Task Force’s (EITF) May 2019 meeting and will discuss the issue in a future meeting.

What We’ve Seen

The complexities associated with contract modifications that allow customers to convert an on-premise license to a SaaS arrangement have resulted in diverse interpretations and applications of the guidance. This diversity is largely a result of the stark contrast between how revenue is recognized for on-premise licenses (up front when control transfers) versus SaaS arrangements (over time during the subscription period).

Here are some common interpretations of the guidance, as well as their potential challenges.