Formula
RPO = deferred revenue + unbilled contracted revenue
(non-cancellable terms only)
cRPO = portion of RPO to be recognised in the next 12 monthsWorked example
Illustrative figures. A three-year contract at $120,000 a year from 1 July, invoiced annually in advance, at 31 December of the first year.
| Line | USD |
|---|---|
| Deferred revenue, contract year 1 | 60,000 |
| Not yet invoiced, contract year 2 | 120,000 |
| Not yet invoiced, contract year 3 | 120,000 |
| RPO | 300,000 |
cRPO = 60,000 + 60,000 = 120,000
ARR = 120,000
RPO and contracted ARR
RPO is an accounting disclosure measured in revenue over the remaining term; contracted ARR is an operating run rate. A long contract adds its full remaining value to RPO but only its annual run rate to contracted ARR.
Practical expedients
Both standards permit the omission of contracts with an original expected duration of one year or less, and of revenue recognised under the right-to-invoice expedient. ASC 606 also allows certain variable consideration, such as usage-based fees, to be excluded; IFRS 15 has no equivalent. Companies that apply the expedients say so, and RPO is therefore not always comparable between companies.
Cancellable contracts
Only the non-cancellable portion is included. Monthly contracts that the customer can end without penalty contribute little or nothing to RPO, however long they are expected to continue.
Where Revnewed fits
Revnewed does not recognise revenue or hold deferred revenue, so it does not calculate RPO. Contracted ARR and backlog are the operating measures it reports instead.
Contracts hold service dates, contract type, auto-renewal status and total contract value, which support an RPO schedule prepared in the accounting system.
Common misstatements
- RPO presented as ARR
- RPO grows with contract length; ARR does not.
- Cancellable periods included
- Value the customer can terminate without penalty is not a remaining obligation.
- Renewals assumed
- Expected but unsigned renewals are not contracted.