SUBSCRIBED / FALL 2017
“Make no mistake: These new standards will result in winners and losers.”
As Redpoint Ventures analyst Tomasz Tunguz notes, “If you sift through the 40+ public SaaS businesses, you won’t find mention of annual recurring revenue, churn, account expansion, or cash-collection cycles in most of them — even though these are the metrics the management teams employ to evaluate and steer their businesses.” The new standards are based on one overarching principle: companies must recognize revenue when goods and services are transferred to the customer, in an amount that is proportionate to what has been delivered at that point. That’s pretty easy to do when you’re selling widgets but poses problems in the digital economy, where service relationships can change drastically over time. For starters, subscriptions change frequently. When a company adds a few Salesforce seats, for example, contract changes are the norm. In my company’s experience, subscriptions contract undergo an average of four mid-term changes. These changes can make the most basic compliance obligation — identifying a contract — a matter of some debate. In some circumstances, contract changes are handled as a modification to the existing contract, while in other situations, a separate contract is created. Additionally, subscriptions are complex and rolled out over time. The handling of common subscription characteristics — e.g., evergreen subscriptions, nonrefundable upfront fees — becomes tricky when companies have to decide whether to recognize revenue right away or defer it. For example, usage-based pricing, which is great for customers of Twilio or New Relic, can
make determining your transaction price more complicated. And with any change to your service (adding, subtracting, or changing the type of service), your finance team will need to assess the accounting treatment.
about them. Smart, progressive companies like Zendesk, SurveyMonkey, and Dell EMC are already automating their finances, educating investors, and recasting revenues. Others, not so much.
Now for the bad news: I mentioned that these changes are right around the corner, didn’t I? The big public companies have about six months to get their act together, hence the opening quote from Google’s head of technical accounting.
This isn’t just a back-office issue. For subscriptionbased companies, this has the potential to impact sales commissions, go-to-market strategies, compensation plans, product roadmaps, everything. The doomsday clock is ticking.
The latest PricewaterhouseCoopers survey on the topic, which came out just two months ago, is not reassuring: 75 percent of public companies surveyed were currently assessing the impact of the new standard but had not yet started implementing it. Just over half of the companies had not even chosen a method of adoption. Make no mistake: These new standards will result in winners and losers. Right now, lots of finance departments are either panicking to no effect or being dangerously ignorant 23
