Handbooks | December 2019

Updated Handbook: Revenue for software and SaaS

KPMG explains how the revenue standard (ASC 606) applies to software licensing and SaaS arrangements. We provide detailed Q&As and examples, as well as comparisons to legacy US GAAP – updated for continuing developments in practice.


ASC 606 and ASC 340-40

  • 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 Effective Effective
Interim periods – In fiscal years beginning after Effective Dec.15, 2019
Early adoption allowed in fiscal years beginning after 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

This December 2019 edition of our Handbook includes new and updated interpretations based on our experiences with software companies implementing ASC 606, as well as discussions with the FASB and SEC staff.   

Key impacts include the following:

  • VSOE and ‘essential to the functionality’ no longer drive the determination of separate contract elements. This generally results 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 is 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 is only 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 are 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 are capitalized for contracts over one year; fulfillment costs are 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

Spotlight on contributors

Nick Burgmeier

Nick Burgmeier

Partner, Dept. of Professional Practice, KPMG US

Scott Muir

Scott Muir

Partner, Dept. of Professional Practice, KPMG US



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