Revenue recognition is the most complex accounting area for SaaS and subscription-based businesses. Ind AS 115 provides the framework — but applying it to real-world SaaS arrangements requires judgment.
The Five-Step Model
- Identify the contract with the customer
- Identify performance obligations — distinct promises to transfer goods or services
- Determine the transaction price — including variable consideration
- Allocate the transaction price to each performance obligation
- Recognise revenue when (or as) each performance obligation is satisfied
The most common SaaS mistake: Treating annual subscriptions as revenue on receipt rather than recognising them evenly over the subscription period. This can materially overstate revenue in Q1.
Subscription Revenue
A SaaS subscription is a series of daily performance obligations. Revenue must be recognised over the subscription period, not at contract inception. For an annual subscription of ₹12 lakh signed on October 1, only ₹3 lakh is revenue in FY ending March 31. The remaining ₹9 lakh sits as deferred revenue on the balance sheet.
Variable Consideration
Usage-based pricing, volume discounts, and refund rights all create variable consideration that must be estimated and constrained before being included in the transaction price.