How SaaS Companies Should Report Multi-Year Contract Value on the Balance Sheet

Hold on to your hats. We’re going to dip a toe into the world of revenue recognition. Before we begin, we should note that we are not accountants, and we relied heavily on our partners at PlusPoint Consulting – who are steeped in the world of SaaS financial statements and generous with their time – for much of the information below.

As most SaaS companies are familiar with by now, ASC 606 requires companies to recognize subscription revenue ratably as the service is delivered. For contracts with upfront payments, this means spreading out the income from the cash received in periodic increments over the duration of the contract. For example, with an annual contract paid upfront, a company would recognize 1/12^th of the payment as revenue on the P&L each month over the 12 months. On the Balance Sheet, the company would record the cash received from the upfront payment in its cash balance and make an offsetting entry in Deferred Revenue (a liability). In each passing month, the company would decrease the original Deferred Revenue balance for this contract by 1/12^th as it recorded that revenue on the P&L.

The vast majority of SaaS operators are familiar with this revenue recognition treatment and know how to properly record it in their financials.

However, recently we have seen several instances in which companies have been tripped up when accounting for multi-year contracts for which not all years have been invoiced.

Mistakenly Grossing up the Balance Sheet

These companies reported the total contract value of their multi-year contracts, including the unbilled future years, on the Balance Sheet across some combination of cash, unbilled Accounts Receivable, Deferred Revenue, and unbilled Deferred Revenue. The result of this is an inadvertent grossing up of the balance sheet – that is making your assets and liabilities greater than they actually are.

Let’s use an example to illustrate the correct way to handle this situation.

We’re a SaaS company that has signed up a new client to a three-year deal for $12,000 each year, invoiced annually. We’ve just received payment for the first year of service. We record the $12,000 under cash on the Balance Sheet and make an offsetting entry in Deferred Revenue. But what about the other $24,000 in future revenue from years two and three of the contract? How can we keep track of this and where should we record it?

The Correct Presentation on the Balance Sheet Typically Involves Netting

For internal tracking purposes, companies may record total contract value in unbilled Accounts Receivable and Deferred Revenue on the trial balance. However, when it comes to reporting on the Balance Sheet, these values should be netted out to avoid grossing up the Balance Sheet in error. This means that the $24,000 in unbilled Accounts Receivable for this contract should be offset against the $36,000 in Deferred Revenue (the $12,000 in actual revenue received plus the $24,000 in future revenue from years two and three of the contract). The result is a net Deferred Revenue balance reported on the Balance Sheet of $12,000.

To summarize, it is okay to record total contract value as Deferred Revenue to keep track of future invoices, especially for companies that do not use a contract management tool. However, this should be done for internal tracking purposes only and it should not impact reporting on the Balance Sheet.  That said, for SaaS companies with even slightly complicated contracts, we highly recommend a subscription revenue management platform such as Maxio (formerly SaaS Optics), HubSpot, Salesforce, or NetSuite.

Evan Tuck

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