Arbor Peak Software, Inc. invoices and collects $120,000 upfront on 1/1/20X5 for a customer contract that includes 12 months of stand ready access to hosted software and a one time implementation service that is distinct.
The accounting question is not whether cash was received, it is how much of that $120,000 is earned at signing versus how much must stay deferred at each month end, because the balance sheet needs to show the remaining obligation to provide access or perform services through 12/31/20X5.
Before we book anything beyond cash and invoicing, we have to decide which promises in the contract are separate deliverables and how the $120,000 contract consideration is split across them, because that split determines what becomes revenue now and what stays as a contract liability.
Under ASC 606, the deferral outcome comes from the five step model in ASC 606 (Topic 606, including the 606-10 overall model), which requires management to identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price to performance obligations based on standalone selling prices, and recognize revenue as each performance obligation is satisfied.
When consideration is billed or collected before the related performance obligation is satisfied, the unsatisfied portion is presented as a contract liability, often labeled Deferred Revenue, and when revenue is recognized before billing, the unbilled portion is presented as a contract asset.
Now commit on the case facts, which outputs do we need to compute to know the 1/31/20X5 Deferred Revenue balance:
We already know the promises. A 12 month stand ready SaaS access service and a distinct one time implementation service, so the next decision is whether we allocate the $120,000 based on the invoice amounts or on standalone selling prices.
ASC 606 requires the transaction price to be allocated to performance obligations based on relative standalone selling prices, so we use the given standalone selling prices of $110,000 for SaaS and $30,000 for implementation, for total standalone selling prices of $140,000.
The allocation is a ratio calculation, and the check is that the allocated amounts sum back to the $120,000 transaction price.
| Performance obligation | Standalone selling price | SSP ratio | Allocated transaction price |
|---|---|---|---|
| SaaS access (12 months) | $110,000 | 110,000 ÷ 140,000 = 0.785714 | $120,000 × 0.785714 = $94,286 |
| Implementation (distinct) | $30,000 | 30,000 ÷ 140,000 = 0.214286 | $120,000 × 0.214286 = $25,714 |
| Total | $140,000 | 1.000000 | $120,000 |
The totals foot because $94,286 + $25,714 = $120,000, so any deferral at 1/1/20X5 is based on these allocated amounts, not the invoice description.
Now decide what portion of the SaaS allocation is earned by 1/31/20X5 if access is provided evenly over time: