Worked example
Illustrative figures. A hosted subscription live from 1 November, reported at 31 December, assuming implementation is a distinct performance obligation delivered in November. Annualising the quarter’s revenue gives a figure that is not ARR.
| Line | ARR at 31 Dec | Q4 revenue |
|---|---|---|
| Subscription, $120,000 a year | 120,000 | 20,000 |
| Implementation, $15,000 | – | 15,000 |
| Total | 120,000 | 35,000 |
ARR at 31 Dec = 120,000
Q4 revenue = 20,000 + 15,000 = 35,000
Q4 revenue × 4 = 140,000
How they differ
| ARR | Recognised revenue | |
|---|---|---|
| Basis | Contracts in force on a date | Performance obligations satisfied |
| Timing | Point in time | Over a period |
| One-time fees | Excluded | Recognised as the related obligation is satisfied; set-up fees that are not distinct, over the subscription period |
| Usage | Excluded above commitments | Recognised as consumed |
| Standard | Company definition | ASC 606, IFRS 15 |
| Assurance | Not audited | Audited |
Reconciling ARR to revenue
A reconciliation starts from total recognised revenue for the period, removes non-recurring revenue (services, one-time fees, usage above commitments) and annualises the recurring remainder on the same basis as ARR, for example the final month × 12.
The remaining difference is explained by timing, since contracts that started or ended during the period contribute to revenue for part of it but to ARR only if live on the measurement date; by recognition, where ramps or free periods are recognised straight-line and set-up fees that are not distinct are spread over the term; and by exchange-rate policy.
Which to present
Boards and investors use ARR for growth and retention, and recurring-revenue lenders often set covenants on it; auditors work from recognised revenue. Present both, each defined, with the reconciliation available on request.
What Revnewed provides
Revnewed calculates ARR from contracts. It does not recognise revenue: ASC 606 and IFRS 15 remain in the accounting system.
Line items carry a revenue type (recurring, one-time, usage or metered) and service dates, which separate recurring from non-recurring contract value when a reconciliation is prepared.
Common misstatements
- ARR described as revenue
- Presenting ARR in a revenue line, or calling it revenue, invites questions from auditors and acquirers.
- Annualised revenue presented as ARR
- A quarter’s revenue multiplied by four includes non-recurring revenue and timing effects.
- No reconciliation prepared
- A diligence team will rebuild the bridge from ARR to revenue. It is better prepared in advance.