If your GAAP revenue and ARR are telling different stories, you’re not alone. Here’s what to do.
As a B2B SaaS business, you’re likely thinking about your revenue in two different ways:
- GAAP revenue, which follows a uniform set of rules from the Financial Accounting Standards Board (FASB), measures recognized revenue for the amount of time that the service has been delivered.
- ARR, on the other hand, measures your recurring revenue.
These metrics represent fundamentally different ways of thinking about revenue, and they serve different purposes.
Unfortunately, these two numbers often don’t match up, leaving finance leaders and executives wondering whether it’s necessary—or worthwhile—to try to reconcile them. How close should the two metrics be to each other? Does it even matter?
Good news! Your GAAP revenue and ARR don’t need to match.
While both metrics are dealing with your revenue, they should be thought of as completely different measurements that have different functions.
GAAP revenue is used by the finance team for taxes, audits, and SEC filings.
ARR is used by the leadership team (including the finance team) for analytics and business strategy.
It’s normal and perfectly fine for the two metrics to be different, as long as they’re on the same order of magnitude. While you could try to reconcile the numbers, it’s not necessarily the best use of time and won’t give you any meaningful insights. Instead, it’s best to treat your revenue metrics as separate methods for separate purposes.
What you should do instead of reconciling your GAAP revenue and ARR
Even though you don’t need to reconcile your GAAP revenue and ARR, there are a few things you can do to set yourself up for success.
- Ensure you’re using the same sources of data (and that those sources are accurate) when calculating your GAAP revenue and ARR.
- Consider getting out of the spreadsheet. If you’re basing your calculations on a complicated Excel file, then you're introducing opportunities for errors, and your data will nearly always be out of date. That’s why it’s helpful to upgrade from the spreadsheet to a more powerful source of truth for your B2B SaaS metrics like Subscript.
FAQs
Even though you don't need to reconcile your GAAP revenue and ARR, there are a few things you can do to set yourself up for success. Ensure you're using the same sources of data (and that those sources are accurate) when calculating your GAAP revenue and ARR. Consider getting out of the spreadsheet.
What is the relationship between revenue and ARR? ›
ARR vs. Revenue. While ARR is the annualized version of MRR, ARR and total revenue are quite different. The total revenue for your business considers all of your cash coming into the business, while ARR measures solely your subscription-based revenue.
What is the GAAP rule for revenue recognition? ›
Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and when revenue is to be recognized. The revenue recognition principle using accrual accounting requires that revenues are recognized when realized and earned–not when cash is received.
Is annual recurring revenue a non-GAAP metric? ›
ARR stands for annual recurring revenue. It is forward-looking and limited to recurring revenue only. ARR projects the amount of recurring revenue a SaaS business will realize over the next 12 months from the current set of customers. ARR is not a GAAP metric.
What is the effect of GAAP and IFRS on the financial statements using the revenue recognition method? ›
Essentially, IFRS is based on the guiding principle that revenue is recognized when value is delivered. GAAP has much more specific rules regarding how revenue is recognized in different industries, but essentially, income isn't recognized until goods have been delivered or a service has been rendered.
What is the difference between GAAP revenue and ARR? ›
The most common difference between Annual Recurring Revenue and GAAP recognized revenue is that ARR may exclude certain revenue items, such as implementation fees, one time development work, sales of physical goods, non-recurring services, etc.
Should ARR be higher than revenue? ›
Is ARR Better Than Revenue? With a SaaS business, ARR and revenue are both important metrics. Generally speaking, neither is better than the other. The one you rely on will depend on the kind of business you own/work for.
What are the three important guidelines for revenue recognition? ›
According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied: Risks and rewards of ownership have been transferred from the seller to the buyer. The seller loses control over the goods sold. The collection of payment from goods or services is reasonably assured.
What is GAAP vs non-GAAP revenue recognition? ›
The biggest difference between GAAP and non-GAAP is that non-GAAP figures are not required to include non-recurring or non-cash expenses. Non-recurring expenses are seen as one-time or extraordinary expenses, such as one-off real estate or equipment purchases or costs following an accident.
What are the five steps in the US GAAP revenue recognition model? ›
The ASC 606 how-to guide: Revenue recognition in five steps
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognize revenue when the entity satisfies a performance obligation.
The recommended approach for translating an ARR forecast into a revenue forecast is to take the forecasted ARR number in a given month and divide it by 12.
What is recurring revenue GAAP? ›
More Definitions of Recurring Revenue
Recurring Revenue means, with respect to any measurement period, recurring revenue from software as a service contracts and maintenance support contracts, in each case, recognized in accordance with GAAP during such period.
What is a good ARR percentage? ›
The ARR growth rate is an excellent indicator of whether your business is growing and thriving or not. Your SaaS business's ideal ARR growth rate is between 20% and 50%. Why? Under 20%, your company isn't growing fast enough to become a successful business in the long term.
What does GAAP say about revenue recognition? ›
GAAP Revenue Recognition Principles
It states: “The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”
Can you recognize revenue before invoicing? ›
Revenue should be recognized when earned, while invoicing and cash receipt may occur independently of the earning process. For example, cash may be received prior to the performance of a service and/or encumbrance of any expense.
What is the difference between revenue recognition standards under US GAAP and the IFRS? ›
Recognition of revenue
With regards to how revenue is recognized, IFRS is more general, as compared to GAAP. The latter starts by determining whether revenue has been realized or earned, and it has specific rules on how revenue is recognized across multiple industries.
How does ARR convert to revenue? ›
The recommended approach for translating an ARR forecast into a revenue forecast is to take the forecasted ARR number in a given month and divide it by 12.
What does ARR mean for revenue? ›
Annual recurring revenue (ARR) refers to all ongoing revenue for a product or business, projected over one year. Companies that offer yearly subscriptions use this metric to determine how much revenue they can expect each year.
Is ARR a percentage of total revenue? ›
ARR as a Percentage of Total Revenue is calculated by taking the Annual Recurring Revenue (ARR) and dividing it by the total revenue earned over the same period. This metric provides insight into how much of your total revenue comes from recurring customers rather than one-off purchases or other sources.
What is the difference between revenue and ARR multiples? ›
Revenue multiples
ARR multiples are the ratio between Annual Recurring Revenue (ARR) and company valuation. The Multiple can be found by dividing the Valuation by ARR. i.e., Multiple = Valuation / ARR.
