# Assumptions and Accounting Decisions ## Model Documentation ## Model Assumptions Some of the model’s assumptions are below. If you need more clarification or a way to approximate a change in these assumptions, please [email us](mailto:help@flowcog.com). ### Setup fees for customers Setup fees (if any) charged to customers are always paid, and are not refunded if the customer churns before going live. ### Monthly or Annual Contracts Customers pay a monthly or annual amount for each period (assuming successful completion of the initial Setup phase, i.e. once they’re onboarded). There are no inputs for multi-year deals. ### Commissions Commissions are paid (on SaaS product and Ongoing Professional Services amounts) when the customer is invoiced. The model assumes no commission for setup fees. ### Upgrades/downgrades for projected future customers Upgrades/downgrades do not change the contract length and contracts retain their original renewal date (i.e. 12 months from original start date). ### Cancellation of remaining contract Cancellations (customer churn) of remaining contracts can occur mid-contract, the consequences of which are determined by the Cancellation Policy input (found on the “Funnel Buttom” tab). The majority of SaaS companies allow for this, as they often don’t enforce the contract terms. Note that a cancellation of future service (and thus invoices) is different from a refund of prior services/product use. ## Accounting decisions set in the model ### Revenue Recognition Revenue is recognized when a customer successfully completes the Setup phase. According to accounting standards, revenue is recognized as the company satisfies a performance obligation (e.g. when the client has access to the platform). See [this Grant Thornton guide on ASC 606 and ASC 340-40](https://www.grantthornton.com/library/articles/audit/2017/ASC-606-and-ASC-340-40-with-new-guide.aspx) for further info. ### Setup Fees The treatment of setup fees charged to clients (if any) depends on the type of setup/onboarding: – Normal set-up/activation means this setup revenue is not recognized in the setup phase, but rather recognized over the same time period that the recurring revenue is recognized over – Detailed implementation means this setup revenue is recognized over the course of the setup phase only (i.e. a shorter period) ### Deferred Revenue See [this Grant Thornton guide on ASC 606 and ASC 340-40](https://www.grantthornton.com/library/articles/audit/2017/ASC-606-and-ASC-340-40-with-new-guide.aspx) for further info. ### Contract Cancellations Depending on the choice in the refunds for cancellations input, refunds related to cancellations of remaining contracts will reduce non-recurring revenue. Cancellable: – refund issued for unused months – setup revenue (if any) recognized either during setup phase or in customer’s first live month Non-cancellable and penalty enforced: – refund not issued for unused months – setup revenue (if any) recognized either during setup phase or over contract term Non-cancellable but penalty is not enforced: – refund issued for unused months – setup revenue (if any) recognized either during setup phase or over contract term ### Commissions Commissions are expensed when they are paid out to sales reps. They are included in the Sales and marketing line item, as they do not directly enable the satisfaction of a contract’s performance obligations. ### No capitalization of software development costs While this model complies with US GAAP in most ways, its main purpose is still capturing the **economic reality of the business for use in decision-making**. There’s a strong argument to be made that capitalizing software development costs (like payroll) weakens the interpretability of financial statements for managerial purposes. [This article](https://www.saas-capital.com/blog-posts/capitalizing-software-development-costs-in-a-saas-business/) takes a strong stance on the topic. If you choose to capitalize, [here](https://frv.kpmg.us/content/dam/frv/en/pdfs/2020/ifrs-us-gaap-2020.pdf) [are](https://www.wallstreetprep.com/knowledge/accounting-capitalized-software-costs/) [some](https://larsco.com/how-should-tech-companies-treat-the-accounting-of-software-development-costs/) [links](https://www.pyapc.com/insights/capitalization-of-software-development-costs-for-saas-companies-and-others-that-develop-software/) that can help. **Note** that if you choose to capitalize you’d have to tag the B/S balance as something like “Other Current Assets”, and amortize that balance each month. A corresponding expense for this amortization will also have to be recorded in the “Other” expense bucket. ## Income Statement line item allocations FlowCog lets you choose the mapping of your accounting system accounts to Income Statement line items, below are our recommendations. ### Subscription Revenue - SaaS Product Line item mapping recommendation: Subscription Revenue – SaaS Product ### Subscription Revenue - Ongoing Professional Services Line item mapping recommendation: Subscription Revenue – Ongoing Professional Services ### Non-Subscription revenue Line item mapping recommendation: Non-Subscription revenue ### Direct cost of revenue - SaaS Product Line item mapping recommendation: Cost of revenue – SaaS Product ### Direct cost of revenue - Ongoing Professional Services Line item mapping recommendation: Cost of revenue – Ongoing Professional Services ### Payroll Line item mapping recommendation: Select the “Allocate based on department payroll” option. This method will automatically allocate the account (from your accounting system) to each P&L line item based on the % of salaries allocated to each P&L line item (found on the “Other Inputs” tab in the “Financial Statement Classification” section. ### Benefits ### Sales Commissions Line item mapping recommendation: Sales and marketing. This is based on how public SaaS companies categorize sales commissions. ### Recruiting Line item mapping recommendation: General and administrative ### T&E Line item mapping recommendation: Allocate to each P&L Line Item expense. ### Rent Line item mapping recommendation: Allocate based on department payroll. ### Facility Line item mapping recommendation: Allocate based on department payroll. ### Marketing Line item mapping recommendation: Sales and marketing. ### Software Subscriptions Line item mapping recommendation: Allocate to each P&L Line Item expense. ### Consulting & Outside Services Line item mapping recommendation: Allocate to each P&L Line Item expense. ### Legal Line item mapping recommendation: General and administrative. ### Depreciation Line item mapping recommendation: General and administrative. ### Other Line item mapping recommendation: Allocate to each P&L Line Item expense. ### Interest (Expense) Income, net Line item mapping recommendation: General and administrative. ### Other Income (expense) Line item mapping recommendation: General and administrative. ### (Benefit from) income taxes Line item mapping recommendation: General and administrative.