salesforce.com inc. (CRM)
Analysis of Revenues
High level of difficulty
Accounting Policy on Revenue Recognition
Adoption of Topic 606
Effective at the start of fiscal 2019, Salesforce adopted the provisions and expanded disclosure requirements described in ASU 2014-09 also referred to as Topic 606. Salesforce adopted the standard using the full retrospective method. Accordingly, the results for the prior comparable periods were adjusted to conform to the current period measurement and recognition of results.
The impact of Topic 606 on reported revenue results was not material. Topic 606, however, modified Salesforce’s revenue recognition policy in the following ways:
- Removal of the limitation on contingent revenue, which can result in the subscription and support revenue for certain multi-year customer contracts being recognized earlier in the duration of the contract term;
- More allocation of subscription and support revenues across Salesforce’s cloud service offerings and to professional services revenue; and
- Inclusion of an estimate of variable consideration, such as overage fees, in the total transaction price, which results in the estimated fees being recognized ratably over the contract term, further resulting in the recognition of subscription and support revenues before the actual variable consideration occurs.
Salesforce used the following transitional practical expedients in the adoption of Topic 606:
- Salesforce has not disclosed the remaining performance obligation (formerly, remaining transaction price) for all of the reporting periods prior to the first quarter of fiscal 2019; and
- Contracts modified before fiscal 2017 were reflected using the retrospective method.
Additionally, as part of its business strategy, Salesforce periodically makes acquisitions of complementary businesses, services and technology. These acquired businesses may have customer arrangements that include the delivery of an on-premise software element combined with a software-as-a-service element. This was the case with Salesforce’s acquisition of MuleSoft, Inc. (“MuleSoft”) in May 2018. Salesforce has to apply significant judgment to determine the appropriate revenue recognition policy for such products and services since Topic 606 eliminated the provision that service revenue accounting was appropriate when the relative selling price of one or more deliverables in a multiple element solution arrangement could not be determined.
Revenue Recognition Policy
Salesforce derives its revenues from two sources: (1) subscription revenues, which are comprised of subscription fees from customers accessing Salesforce’s enterprise cloud computing services (collectively, "Cloud Services"), software licenses, and from customers paying for additional support beyond the standard support that is included in the basic subscription fees; and (2) related professional services such as process mapping, project management and implementation services. Other revenue consists primarily of training fees.
With the adoption of Topic 606, revenue is recognized upon transfer of control of promised products and services to customers in an amount that reflects the consideration Salesforce expects to receive in exchange for those products or services. If the consideration promised in a contract includes a variable amount, for example, overage fees, contingent fees or service level penalties, Salesforce includes an estimate of the amount it expects to receive for the total transaction price if it is probable that a significant reversal of cumulative revenue recognized will not occur.
Salesforce determines the amount of revenue to be recognized through application of the following steps:
- Identification of the contract, or contracts with a customer;
- Identification of the performance obligations in the contract;
- Determination of the transaction price;
- Allocation of the transaction price to the performance obligations in the contract; and
- Recognition of revenue when or as Salesforce satisfies the performance obligations.
Salesforce’s subscription service arrangements are non-cancelable and do not contain refund-type provisions.
Subscription and Support Revenues
Subscription and support revenues are comprised of fees that provide customers with access to Cloud Services, software licenses and related support and updates during the term of the arrangement.
Cloud Services allow customers to use Salesforce’s multi-tenant software without taking possession of the software. Revenue is generally recognized ratably over the contract term.
Since the May 2018 acquisition of MuleSoft, subscription and support revenues also includes software licenses. These licenses for on-premises software provide the customer with a right to use the software as it exists when made available. Customers purchase these licenses through a subscription. Revenues from distinct licenses are generally recognized upfront when the software is made available to the customer. In cases where Salesforce allocates revenue to software updates and support, primarily because the updates are provided at no additional charge, such revenue is recognized as the updates are provided, which is generally ratably over the contract term.
Salesforce typically invoices its customers annually. Typical payment terms provide that customers pay within 30 days of invoice. Amounts that have been invoiced are recorded in accounts receivable and in unearned revenue or revenue, depending on whether transfer of control to customers has occurred.
Professional Services and Other Revenues
Salesforce’s professional services contracts are either on a time and materials, fixed fee or subscription basis. These revenues are recognized as the services are rendered for time and materials contracts, on a proportional performance basis for fixed price contracts and ratably over the contract term for subscription professional services contracts. Training revenues are recognized as the services are performed.
Significant Judgments - Contracts with Multiple Performance Obligations
Salesforce enters into contracts with its customers that may include promises to transfer multiple Cloud Services, software licenses, premium support and professional services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.
Cloud Services and software licenses are distinct as such offerings are often sold separately. In determining whether professional services are distinct, Salesforce considers the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription start date and the contractual dependence of the service on the customer’s satisfaction with the professional services work. To date, Salesforce has concluded that all of the professional services included in contracts with multiple performance obligations are distinct.
Salesforce allocates the transaction price to each performance obligation on a relative standalone selling price ("SSP") basis. The SSP is the price at which Salesforce would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.
Salesforce determines SSP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include Salesforce’s discounting practices, the size and volume of Salesforce’s transactions, the customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical sales and contract prices. As Salesforce’s go-to-market strategies evolve, Salesforce may modify its pricing practices in the future, which could result in changes to SSP.
In certain cases, Salesforce is able to establish SSP based on observable prices of products or services sold separately in comparable circumstances to similar customers. Salesforce uses a single amount to estimate SSP when it has observable prices.
If SSP is not directly observable, for example when pricing is highly variable, Salesforce uses a range of SSP. Salesforce determines the SSP range using information that may include market conditions or other observable inputs. Salesforce typically has more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.
Source: 10-K (filing date: 2019-03-08).
Revenues as Reported
salesforce.com inc., Income Statement, Revenues
US$ in millions
|12 months ended||Jan 31, 2019||Jan 31, 2018||Jan 31, 2017||Jan 31, 2016||Jan 31, 2015||Jan 31, 2014|
Based on: 10-K (filing date: 2019-03-08), 10-K (filing date: 2018-03-09), 10-K (filing date: 2017-03-06), 10-K (filing date: 2016-03-07), 10-K (filing date: 2015-03-06), 10-K (filing date: 2014-03-05).
|Revenues||Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).||salesforce.com inc.’s revenues increased from 2017 to 2018 and from 2018 to 2019.|