An interactive, 3-hour workshop covering insights, emerging interpretations and real-life examples pertinent to the Subscription Economy’s adoption of ASC 606. Designed for revenue analysts, controllers, accounting managers at SaaS/Cloud or Software companies, topics will include applying the series guidance, volume based fees, standalone selling prices, allocation practicalities, service add-ons and pricing changes, early renewals, and more. It will also include comparison with the current revenue practices. Seats are limited. Attendees received 3 CPE credits. You must register by June 1st. (A Full-Access Pass is required to attend).

1. Workshop: ASC 606
Application for Subscription Companies
June 2017

2.  Overview and New Terminology
 Transaction- or Volume-based Subscription
 Standalone Selling Prices and Allocations
 Contract Modifications
Agenda
1

3. The Model
Overview
2
Step 1
• Contract with customer
Step 2
• Performance obligations
Step 3
• Expected transaction price
Step 4
• Allocate
Step 5
• Recognize revenue
Floccinaucinihilipilification?!
New Terms:
• Stand-ready
• Distinct
• Series
• Variable consideration
• Variable consideration constraint
• Material right
• Contract term

4. Transition Methods
3
Full
retrospective
• Recast all periods presented in financials
• Disclosures for all periods presented
• Adjustment to retained earnings at the beginning of
the first period presented
Modified
Retrospective
• No change to prior periods
• Dual reporting for year of adoption
• Adjustment to retained earnings at the beginning
of initial application period

5. Current Status of Adoption
4
4%
9%
87%
8%
42%
50%
6%
43%
51%
0%
20%
40%
60%
80%
100%
Material Not Material Still Assessing
Nov'16 Study Mar'17 Study May'17 Study (Current)
 Overall, no significant progress has been seen in companies’ disclosures about high-level adoption impacts.
 31% of the IFRS companies sampled and 52% of the US GAAP companies sampled have discussed their preliminary
conclusion as to whether there is significant adoption impact.
 For the “still assessing” group, 25% of them (48 companies) have elected the modified retrospective method and 9% (18
companies) have elected the full retrospective method.
 Many companies continue to caveat their potential impact disclosures that
(a) the company’s current assessment is preliminary, still ongoing, and subject to change and
(b) resolution or evolvement of certain industry-specific open issues may result in changes to the current conclusions.

6. Delivery pattern: frequently straight-line
Stand-ready
A
Delivery within a vendor’s
control, but goods or services
should be further developed
When-and-if-available updates
B
Delivery is outside of the control
of a vendor or customer
A vendor promises to merchant to
process as many credit card
transactions on its platform as may
be initiated by consumers
C
Delivery within the control of a
customer
Technical support
D
A vendor makes goods or
services continuously available
Infrastructure as a service, access to
data center capacity
5

7. Distinct
Capable of being distinct
Can be used, consumed, sold,
held for economic benefits
• On its own, or
• With resources already obtained
from the vendor or from others, or
• With resources sold separately
(by any entity)
Distinct
Distinct in context of the contract
Is NOT part of a combined output.
Indicators for assessment include:
• Significant integration
• Significantly modify or customize
another item
• Each item is significantly affected
by other item(s)
• Separable execution risks
6

8. Distinct Considerations
1
Implementation
related to subscription
• Customer or others can do
• No significant customization
• Subscription can start prior to completion of
implementation
• Non-refundable
2
Different subscription
offerings
• Customer can use and benefit separately
• Can be purchased separately
• Combined functionality is simply additive (not
transformative)
• Not co-terminus
3
SaaS and on-premise
(off-line and on-line
versions of ERP)
• On-premise is not simply a delivery
mechanism
• Can be used separately from each other
• Combined functionality is simply additive (not
transformative)
7

9. Series
Day 1 Day 2 Day 3 Day …
Last
Day
Single Performance Obligation comprising of a series
of daily subscriptions
To be a Series, all below should be met:
1. More than one distinct good or service
2. Substantially the same
3. Satisfied over time
To be a Series
Simpler accounting for
transaction based fees
8

10. • A portion or the entire consideration under a customer contract might vary
 Example:
– A SaaS billing processor charges $0.10 to its customer per each consumer bill processed.
– The price per bill during each specific month decreases to $0.075 for all bills in excess of
10,000,000 processed during that month.
Variable Consideration
9

11. • A portion or the entire consideration under a customer contract might vary
 Example:
– A credit card processer charges the bank 0.5% per each credit card transaction processed.
– If the total dollar amount of transactions processed during a year exceeds $0.5 billion,
a rebate of $100,000 is provided.
Variable Consideration
10

12. • A portion or the entire consideration under a customer contract might vary
 Example:
– A vendor provides online storage solutions to its customers and charges $10 per each TB of
managed storage.
– Each contract includes a committed minimum of $1,000 per year.
– However, the vendor has a past practice of not enforcing contractual minimum.
Variable Consideration
11

13. • A portion or the entire consideration under a customer contract might vary
 Example:
– Cloud-based ERP vendor implements its solution for a number of customer locations.
– The scope of implementation services is clearly defined.
– The implementation services are billed on T&M basis.
Variable Consideration
12

14. Options:
Material Right vs. Marketing Offer
1 Year
Renewal
at $1,000
Option is simply a marketing offer
Ignore renewal option until exercised
1 Year
Renewal
at $600
Estimated
probability of
exercise 90%
Option is a material right:
Approach 1:
Option price: (1,000 – 600) * 90% = 360
% Allocation: 1,000 / (1,000 + 360) = 73.5%
1st year Subscription: 1,000 * 73.5% = 735
Approach 2:
Transaction price: 1,000 + 600 * 90% = 1,540
1st year Subscription: 1,540 / 2 = 770
Approach 3:
Transaction price: 1,000 + 600 = 1,600
1st year Subscription: 1,600 / 2 = 800
13
1 Year
Subscription
at $1,000
1 Year
Subscription
at $1,000

15. Contract Term
3 Year
SaaS
No early
termination
3 Years
3 Year
SaaS
90-d notice
termination
w/o
significant
penalty
90 days
3 Year
SaaS
Fully
prepaid ???
Significant
Termination
Penalty
Non-
refundable
14

16. Revenue is not Constrained by Billings
Quarter
1
Quarter
2
Quarter
3
Quarter
4
Quarter
5
Quarter
6
Quarter
7
Quarter
8
Bill
$100
Bill
$100
Bill
$100
Bill
$100
Bill
$120
Bill
$120
Bill
$120
Bill
$120
$110 $110 $110 $110 $110 $110 $110 $110
Revenue
$10 $20 $30 $40 $30 $20 $10 -
Contract Asset
15

17. Commission Deferral
Accrue Defer Amortize
Test for
impairment
• In most of the cases
timing of accrual is
not expected to
change
• Should be incremental
• Tiered and quota-
based may qualify
• Required if the benefit
period is longer than
12 months after
contract inception
date
• Consider anticipated
renewals
• Consider other related
costs (payroll taxes)
• Consistent with
benefits
• Consider anticipated
renewals if no or
smaller commissions
are paid upon renewal
• Can be longer than
contract term or
product life
• May have to be
allocated to different
performance
obligations
• Future receipts +
deferred revenue
• Include expected
variable consideration
16

18.  Stand-ready
 Distinct
 Series
 Variable Consideration
 Material Right
 Contract Term
 Contract Asset
 Commission Deferral
Recap
17

19. 18
Questions?

20. When to Recognize as Earned
Subscription with transaction-based fees
Series
Variable consideration relates specifically to
(i) efforts to transfer, or
(ii) specific outcome from transferring
service within the Series
As “earned” is consistent with the “allocation
objective”
ⱱ
ⱱ
ⱱ
Allocation Objective Factors
• Price is not required to be the same
per transaction!
• Consistency in price per
transaction
• Whether commensurate with the
value to the customer
• Whether commensurate with the
efforts to fulfill the service
• Consistency with the entity’s
customary pricing practices
19

21. Allocation Objective is not Achieved
2-year SaaS contract:
• $0.10 per transaction in year 1 (part of the fee is used to recoup certain expenditures
incurred by the vendor to customize the SaaS solution)
• $0.06 per transaction in year 2
Estimate
Transaction
Price
Measure of
Progress
Recognize True-up
• 3 mln transactions in
year 1
• 5 mln transactions in
year 2
• Transaction price is
$600,000
• Assume straight-line • 50% progress at the
end of Year 1
• Revenue for Year 1
before true-up:
$300,000
• 2 mln of actual
transactions for year 1
• Revised estimate for
year 2 is 3 mln
• Revised Transaction
Price is $380,000
• Year 1 revenue:
$190,000
• True-up: ($110,000)
20

22. Fixed Up-Front and Volume-based Fee
2-year SaaS contract:
• $120,000 fixed fee to recoup certain expenditures incurred by the vendor to customize the
SaaS solution
• $0.06 per transaction fee
• N/A • Assume straight-line • Assume 2.0 mln
actual transactions in
Year 1
• Fixed fee revenue =
$60,000
• Transaction revenue =
$120,000
• Total = $180,000
• N/A
Estimate
Transaction
Price
Measure of
Progress
Recognize True-up
21

23. Cash Rebate
2-year subscription contract:
• $0.10 per transaction fee
• $100,000 cash rebate if cumulative volume exceeds 10 min transactions
• Estimated volume:
12 mln transactions
• Estimated
Transaction Price:
12,000,000 * $0.10 -
$100,000 =
$1,100,000
• Number of
transactions is the
best measure of
progress
• 4 mln actual
transactions in Year 1
• Progress before true-
up: 4/12 = 33.3%
• Revenue $1,100,000 *
33.3% = $366,667
• 5 mln estimated for
Year 2
• Transaction Price =
$900,000
• Progress: 4/9=44.4%
• Cumulative revenue:
$900,000 * 44.4% =
$400,000
• True-up: $33,333
Estimate
Transaction
Price
Measure of
Progress
Recognize True-up
22

24. Volume-based Discount
Series
Variable consideration relates specifically to
(i) efforts to transfer, or
(ii) specific outcome from transferring
service within the Series
As “earned” is consistent with the “allocation
objective”
ⱱ
ⱱ
Diversity in practice:
• Whether the magnitude of difference in
rates may be considered
• How to assess the significance
2-year SaaS contract:
• $0.10 per transaction fee
• $0.09 for each transaction in excess of 10 million on a cumulative basis
23

25. Volume-based Discount
Outcome 1: As earned is NOT acceptable
Estimate
Transaction
Price
Measure of
Progress
Recognize True-up
• Estimated volume:
12 mln transactions
• Estimated
Transaction Price:
10,000,000 * $0.10
+ 2,000,000 * $0.09
= $1,180,000
• Number of
transactions is
the best measure
of progress
• 4 mln actual
transactions in Year 1
• Progress before true-
up: 4 / 12 = 33.3%
• Revenue $1,180,000 *
33.3% = $393,333
• 5 mln estimated for
Year 2
• Transaction Price =
$900,000
• Progress: 4 / 9 =
44.4%
• Cumulative revenue:
$900,000 * 44.4% =
$400,000
• True-up: $6,667
24

26. Volume-based Discount
Outcome 2: As earned is acceptable
Estimate
Transaction
Price
Measure of
Progress
Recognize True-up
• N/A • N/A • Assume 4.0 mln
actual transactions in
Year 1
• Revenue: 4,000,000 *
$0.10 = $400,000
• N/A
25

27. 26
Questions?

28. Standalone Selling Price – SSP
SaaS
• 2 Performance Obligations
(“PO”) with different pattern
• Transaction price is allocated
based on SSPs
• Standalone Selling Price (SSP): selling price for an item if it is
sold by itself
 Replaces VSOE, TPE and BESP
 Determined at the outset of contract
 Must allow to meet allocation objective (depict expected
consideration for the item)
 Consider all information, maximize observable inputs
Distinct
Implement
SSP
range is
OK
27

29. Standalone Selling Price – SSP
Performance
Obligation
Common SSP metrics Methods to determine SSP
Implementation
services
• $ amount
• % discount from list price
• $ rate per hour per level and
estimated hours per level
• % discount from list price and
estimated hours per level
 Historical pricing of standalone
consulting
 Historical rates in T&M arrangements
 Historical pricing across all types of
transactions
 Rates charged by third parties
 Cost plus reasonable margin
Subscription • $ amount per year or per month
• $ amount per user or per node
• $ amount per transaction or per
dollar value processed
• % discount from list price
• Hybrid: $ amount per year
+ $ amount per transaction
 Renewal pricing
 Historical pricing across all types of
transactions
 By reference to SSP for subscriptions
with a shorter or longer contract term
28

30. Free Implementation
SaaS
• 2 Performance Obligations
(“PO”) with different pattern
• Transaction price is allocated
based on SSPs
Distinct
Implement
PO
Contract
price
SSP % Allocated Duration Billing
Implementation $ - $ 500,000 20% $ 400,000 6 months N/A
Subscription 2,000,000 2,000,000 80% 1,600,000 2 years after
implementation
Annual in
advance
Total $2,000,000 $2,500,000 100% $2,000,000
29

31. Free Implementation
0 - 6
month
7 - 18
month
19 - 30
month
Cumulative
Services (400,000)
Subscription
Cash
(400,000)
400,000C. Asset
(800,000)
1,000,000
(200,000)
(800,000)
1,000,000
(200,000)
(1,600,000)
2,000,000
-
30

32. Implementation & Variable Subscription
• 2 Performance Obligations
(“PO”) with different pattern
• Transaction price is allocated
based on SSPs
Distinct
Implement
• Contractual:
$450,000
• SSP: $500,000
• Duration: 6
months
• Contractual: $0.09
per transaction
• SSP: $0.10 per
transaction
• Duration: 2 years
after implementation
• Actual transactions:
Year 1: 10 mln
Year 2: 15 mln
ⱱ
ⱱ
ⱱ
Is Subscription?
Series
Variable consideration relates
specifically to
(i) efforts to transfer, or
(ii) specific outcome from
transferring
service within the Series
As “earned” is consistent with the
“allocation objective”
Variable
Subscription
31

33. Implementation & Variable Subscription
0 - 6
month
7 - 18
month
19 - 30
month
Cumulative
Services
Subscription
Cash
C. Asset
(450,000) (450,000)
450,000
(900,000)
900,000
(1,350,000)
1,350,000
(2,250,000)
2,700,000
-
32

34. Free Implementation
& Variable Subscription
• 2 Performance Obligations
(“PO”) with different pattern
• Transaction price is allocated
based on SSPs
Distinct
Implement
ⱱ
ⱱ
Series
Variable consideration relates
specifically to
(i) efforts to transfer, or
(ii) specific outcome from
transferring
service within the Series
As “earned” is consistent with the
“allocation objective”
Variable
Subscription
• Contractual: $ -
• SSP: $500,000
• Duration: 6
months
• Contractual: $0.10 per
transaction
• SSP: $0.10 per transaction
• Duration: 2 years after
implementation
PO SSP %
Implementation $ 500,000 20%
SaaS 2,000,000 80%
Total $ 2,500,000 100%
33

35. 0 - 6 month 0 - 18 month 0 - 30 month
Estimated future transactions 20,000,000 20,000,000 -
Actual transactions - 10,000,000 25,000,000
Total transactions 20,000,000 30,000,000 25,000,000
Transaction price ($0.10) $ 2,000,000 $ 3,000,000 $ 2,500,000
Allocated to implementation (20%) $ 400,000 $ 600,000 $ 500,000
Allocated to subscription (80%) $ 1,600,000 $ 2,400,000 $ 2,000,000
Subscription progress* 0.0% 33.3% 100%
Subscription cumulative revenue $ - $ 800,000 $ 2,000,000
* Assume the most appropriate measure of progress is the number of transactions
34
Free Implementation
& Variable Subscription

36. Free Implementation &
Variable Subscription
0 - 6
month
7 - 18
month
19 - 30
month
Cumulative
Services
Subscription
Cash
C. Asset
(400,000) (500,000)
400,000
(800,000)
1,000,000
(1,200,000)
1,500,000
(2,000,000)
2,500,000
-
(200,000) 100,000
(400,000)
Re-estimate
Re-measure
Re-allocate
35

37. Implementation & Variable SaaS
(a) Implementation
is priced at SSP,
and
(b) SaaS rate is at
SSP
Yes
• No estimate
• No reallocation
• No true-up
Implementation
and SaaS rate
have the same
discount
Yes
• No estimate
• No reallocation
• No true-up
SaaS rate has
higher discount
Yes
• Initial estimate and
allocation may be
necessary
• No reallocation
• No true-up
No No No
• Estimate
• Reallocation
• True-up
36

38. 37
Questions?

39. Contract Modifications
Initial contract:
• 2-year SaaS
• Distinct implementation
Modification:
• Add implementation for
5 more locations at SSP
Separate Initial contract:
• 2-year SaaS
• Distinct implementation
Modification:
• Add free implementation
for 5 more locations
Prospective
Initial contract:
• Turnkey implementation
Modification:
• Change agreed scope
for turnkey
implementation when
implementation is still in
process.
Retro Hybrid Rare
38

40. Separate vs. Other
Modification only
ADDS DISTINCT
goods or services
No
Additional
goods or
services are
at SSPs
Yes
Initial
contract
influenced
negotiation
on pricing
Yes
Yes No No
Separate Separate Separate
Separate
39

41. Prospective Example
Contract:
• 2-year SaaS billing processing
• Upfront fee of $2,000,000 plus $0.10 per
transaction
• 10 mln transactions were processed in
Year 1
Modification:
• Executed on the 1st day of Year 2.
• Extended the contract for Year 3
• New rate is $0.08 per transaction and is applicable
immediately
• 10 mln transactions were processed in Year 2
• 20 mln transactions were processed in Year 3
Post modification: 2-year single SaaS
contract at $0.08 per transaction and
fixed amount of $1,000,000 (Why?)
Year 1 Year 2 Year 3 Cumulative
Revenue
Cash
C. Liability
(2,000,000) (5,400,000)
3,000,000 800,000
500,000
1,600,000
500,000
5,400,000
-(1,000,000)
(1,300,000) (2,100,000)
40

42. Timing of Modification
Contract Executed
Priced: $0.10 per
transaction
Parties agreed to
adjust the per
transaction rate
The contract
amendment was
signed by both parties
Contract Executed
Includes
implementation
The parties revised
the scope but were
still working on
finalizing pricing
The contract
amendment with
revised pricing was
executed
41

43. • Key Considerations for Subscription
 Timing of Recognition for Variable Consideration
 Timing of Recognition for Fixed Fee
 Allocation
 Contract Modifications
 Renewal Options
 Commissions
Recap
42

44. 43
Questions?

45. Connor Group professionals deliver to our global clients Technical Accounting, IPO support, Mergers
and Acquisitions, and Financial Operations services from our bases in Silicon Valley, San Francisco,
New York, Salt Lake City, Boston and Europe.
A Premier Professional Services
Advisory Firm Thought Leaders Since 2006
Denis Kozhevnikov
Partner
Denis.kozhevnikov@connorgp.com
Denis is a Partner in Connor Technical Accounting Interpretations
(professional practice). He is a subject matter specialist in software
and technology revenue recognition; SEC reporting; business
combinations and other technical accounting areas. Denis serves as
a technical accounting advisor to our engagement teams on complex
accounting matters and leads special projects, including
implementation of new accounting standards and structuring. As a co-
leader of Connor Technical Accounting Interpretations, Denis is also
responsible for quality and continuing education for our professionals.
He has instructed multiple internal and external trainings on a variety
of accounting topics, including ASC 606 updates, software revenue
recognition, revenue recognition, SEC reporting and others.
Denis is a former director at PricewaterhouseCoopers in Transaction
Services, Accounting Advisory group (San Jose). Denis is a Certified
Public Accountant in California and a Fellow Chartered Certified
Accountant in the United Kingdom. Denis graduated with honors from
Moscow Institute of Physics and Technology with a degree in applied
mathematics and physics. He also has a Master in Financial
Management degree from an international master program organized
by University of Catania (Italy) and Erasmus University Rotterdam
(Netherlands).

46. Connor Group professionals deliver to our global clients Technical Accounting, IPO support, Mergers
and Acquisitions, and Financial Operations services from our bases in Silicon Valley, San Francisco,
New York, Salt Lake City, Boston and Europe.
A Premier Professional Services
Advisory Firm Thought Leaders Since 2006
Ravi Kumar
Partner
Ravi.Kumar@connorgp.com
Ravi is a Partner in Connor Group’s Technical Accounting and IPO
Services practice providing technical accounting assistance on
complex, structured transactions and helping clients achieve IPO
readiness. Ravi has extensive experience in working with complex
debt and equity transactions, consolidations, business combinations,
leasing, revenue recognition (including ASC 606/IFRS 15), and public
private partnerships (PPPs) under both US GAAP and IFRS.
Prior to joining Connor Group, Ravi was a Senior Manager in Ernst &
Young’s Financial Accounting Advisory Services practice. Ravi’s
career background includes cross-functional and multi-national Big-4
experience consisting of on-call technical accounting advice, new
accounting standards implementation assistance, preparation of gap
assessments between financial statements prepared under US GAAP
and IFRS, financial due diligence for mergers and acquisitions, IPO
readiness and financial statement and integrated audits for private
and publicly-traded companies.
Ravi is a licensed Certified Public Accountant in the state of
California, a member of the AICPA, and has passed Level I of the
Chartered Financial Analyst (.CFA) exam.

47. Connor Group professionals deliver to our global clients Technical Accounting, IPO support, Mergers
and Acquisitions, and Financial Operations services from our bases in Silicon Valley, San Francisco,
New York, Salt Lake City, Boston and Europe.
A Premier Professional Services
Advisory Firm Thought Leaders Since 2006
Caroline Yan
Manager
Caroline.Yan@connorgp.com
Linkedin.com/in/carolineyan
Caroline is a Manager in Connor Technical Accounting Interpretations
(professional practice). During her time at Connor Group, she has
worked on engagements such as IPO readiness, S-1 filings, and
various accounting assessments in complex transactions. She has
developed in-depth technical knowledge of revenue recognition,
stock-based compensation, financing transactions, embedded
derivatives, and variable interest entities.
Prior to joining Connor Group, Caroline worked for
PricewaterhouseCoopers with client engagements across
semiconductor, software and internet, medical device and startup
companies. Caroline is a Certified Public Accountant (California) and
has also passed CFA Level I. She has a Master of Accountancy from
Washington University in Saint Louis (Missouri) and Master of
Science in Business Administration from Erasmus University
Rotterdam (Netherlands).