Handbooks   |   December 2018

Handbook: Revenue for software and SaaS

Filed under: Revenue, Industry, Software, Technology

KPMG’s guidance on and interpretation of the application of ASC 606 to software licensing and SaaS arrangements. KPMG explains the revenue recognition standard in detail, providing examples and analysis.


ASC Topic 606 and ASC Subtopic 340-40  (ASU 2014-09ASU 2015-14ASU 2016-08,  ASU 2016-10,  ASU 2016-11ASU 2016-12ASU 2016-20ASU 2017-13ASU 2017-14, ASU 2018-07, ASU 2018-08, ASU 2018-18)

  • All software and software-as-a-service companies

Relevant dates

Mandatory effective dates and early adoption provisions:

Effective date: Public business and certain other entities* All other entities
Annual periods – Fiscal years beginning after Dec. 15, 2017 Dec. 15, 2018
Interim periods – In fiscal years beginning after Dec. 15, 2017 Dec.15, 2019
Early adoption allowed in fiscal years beginning after Dec. 15, 2016 Dec. 15, 2016
* (1) public business entities; (2) not-for-profits that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market; and (3) employee benefit plans that file financial statements with the SEC.


Key impacts

As 2018 nears an end, most public companies have adopted Topic 606 and private companies near their 2019 application date. Most software companies have found that the new standard affects them in some way.

This December 2018 edition of our Handbook includes new and updated interpretations based on our experiences with software companies implementing Topic 606, as well as discussions with the FASB and SEC staff.

Key impacts include:

  • VSOE and ‘essential to the functionality’ no longer drive the determination of separate contract elements. This will generally result in more separate elements, and therefore earlier revenue recognition than under legacy US GAAP
  • VSOE is no longer the only basis for allocating contract revenue to contract elements
  • Software license revenue attributable to distinct software licenses will be recognized at the point in time the customer obtains control of the license, which no longer rests solely on when the software is delivered to the customer
  • Revenue attributable to software license renewals will only be recognizable once the renewal term begins, rather than when the renewal is agreed
  • ASC 606’s elimination of the ‘contingent revenue cap’ that existed in legacy US GAAP means free or discounted services provided up-front will be allocated additional revenue
  • Options to acquire additional copies of delivered software may constitute ‘material rights’, requiring deferral of contract revenue for those rights
  • ‘Sell-through’ recognition in reseller scenarios is eliminated in most circumstances
  • Reporting of sales-based royalties ‘on a lag’ is no longer permitted
  • Contract acquisition costs required to be capitalized for contracts with a duration greater than one year; fulfillment costs required to be capitalized when specified criteria are met and both are amortized over present and future (e.g. anticipated renewal) contract periods

Report contents

  • Software and SaaS industry overview
  • Scope
  • Step 1: Identify the contract with the customer
  • Step 2: Identify the performance obligations in the contract
  • Step 3: Determine the transaction price
  • Step 4: Allocate the transaction price to the performance obligations in the contract
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
  • Contract modifications
  • Contract cost

Related content

Spotlight on contributors

Nick Burgmeier

Nick Burgmeier

Partner, DPP, KPMG US

+1 212-909-5455
Scott Muir

Scott Muir

Partner, Dept. of Professional Practice, KPMG US

+1 212-909-5073
Paul Munter

Paul Munter

Partner, Department of Professional Practice, KPMG US

+1 212-909-5567



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