With the number of Amazon Prime member subscribers growing from 58 million in 2016 to 180 million in 2024, according to Statista, there’s a sustained recurring subscription model that one of America’s most successful retailers has increased more than 200 percent in eight years. Whether it’s a large company such as Amazon or a solopreneur beginning their recurring subscription services, it’s important to first distinguish between overall bookings and recurring revenue; and then to illustrate how businesses can measure these two types of revenue.

Dissecting Annual Recurring Revenue (ARR) and Bookings

Bookings are assurances of all anticipated earnings (recurring and one-off deals) because the business hasn’t satisfied the terms of the contracted services. Once it’s completed, the booking will turn into actual revenue. This factor is present in all sales deals, regardless of when revenue or cash will be transferred to the business from the customer. Non-recurring revenue includes training, special consulting projects, etc. (things that are one-off).

Annual Recurring Revenue (ARR) is a way to gauge recurring revenue a business projects to earn on a yearly basis. It’s quite common in eCommerce industries – be it subscriptions for food, software, etc. that are billed on a monthly or annual time frame.

How ARR Helps Businesses Analyze Operations

Businesses can determine demand trends, which help forecast recurring revenue. Lenders and investors can see how (in)efficient a company is with its marketing and sales efforts. It gives business owners and management the ability to determine customer retention and growth prospects while it provides internal and external users the ability to estimate a subscription’s worth. Additional insight businesses can gain from this metric include how much new customers add, how much renewals and upgrades impact ARR, and how churn and downgrades impact ARR.

How to Value a Company Using ARR

One common metric is Enterprise Value divided by ARR (EV/ARR), which is similar but important to distinguish from the EV/Revenue ratio. Since the ARR only factors in recurring revenue versus the EV/Revenue, which factors in all revenue regardless of the revenue recurring, the initial ratio provides a better assessment of the recurring revenue only. Assuming a company has an ARR multiple of 7 and its ARR is $15 million, the ARR has an enterprise value of $105 million.

Monthly Versus Yearly Recurring Revenue

While Monthly Recurring Revenue is not an entry on a business’s financial statements, it’s more of a key performance indicator (KPI). It’s not uncommon for companies to include it as part of their earnings releases. If a recurring subscription revenue is done monthly, it’s converted into Annual Recurring Revenue (ARR) as follows: MRR x 12 = ARR.

Recording Bookings

When a contract is signed, or an order is placed, it depends on how it’s handled. If the business receives cash prior to completing their monthly or yearly service expectation and say the contract is for $20,000 per month for 12 months, it would be recorded as follows:

Debit: Cash $240,000

Credit: Deferred Revenue $240,000

Since the contract has just been signed, but there’s been no product/service rendered, deferred or unearned, revenue has been created.

For every month that passes, the journal entry will progress as follows:

Debit: Deferred Revenue $20,000

Credit: Revenue $20,000

The deferred revenue account drops from $240,000 to $220,000, assuming the starting deferred revenue balance is even and there’s no deferred revenue.

The following month, the journal entries would be as follows:

Debit: Deferred Revenue $20,000

Credit: Revenue $20,000

This would occur every month until the end of the 12-month period.

Conclusion

When it comes to accounting for revenue, whether it’s booked, fulfilled by the company, or the payment received by the company, along with analyzing the time frame, it’s equally important to be familiar with the type of revenue it is for one to see how the company is performing.

A Dec. 3 proposal from FASB’s Accounting Standards Update (ASU) might provide some flexibility for private businesses and select nonprofits. “Financial Instruments – Credit Losses (Topic 326)” looks at measuring credit losses for contract assets and accounts receivable for these entities.

When it comes to determining projected credit losses for current accounts receivables and current contract assets, businesses face immense resource needs and reporting requirements, including for assets acquired prior to the publication dates of financial statements.

With public comments being received through Jan. 17, 2025, industry professionals have reported that when it comes to gauging projected credit losses for current contract assets and current accounts receivable, there’s a massive undertaking and validation necessary for assets collected prior to financial statement issuance dates. Industry professionals argue that being able to factor in collections post-balance sheet date in calculating expected credit losses would reduce the complexity for preparers, whereas, for third parties, including investors and others who utilize financial statements, it would provide them with valuable data.

FASB proposed an amendment to ASC 326 207 to allow private companies and certain not-for-profit entities to employ a more flexible and efficient way to better gauge their projected credit losses for current contract assets and accounts receivable that originate from transaction accounts under ASC 606.

Working with the Private Company Council (PCC) to look at stakeholders’ concerns that estimating projected credit losses can be exorbitant and complicated for financial proceedings, FASB is soliciting comments on whether or not to expand the scope of entities included for ASU standards, along with different asset classes.

Current Criteria

According to ASC 326-20, when expected credit losses are estimated by entities, an entity must evaluate their ability to garner cash flows via the lens of contemporary economic circumstances, rational and documented projections, and past losses. Past losses may need to be fine-tuned to approximate project credit losses if past circumstances change from present conditions or from well-ground estimates and documented projections. Another consideration when formulating credit loss projections is that entities aren’t required to factor in collections obtained post-balance sheet date.  

Proposed Additions

When it comes to the proposed additions, FASB speaks to a practical expedient and an accounting policy election. The practical expedient concerns an entity’s well-grounded, data-dependent projections. If an entity chooses the practical expedient, it would be able to factor in collection activity beyond the balance sheet date when projecting expected credit losses.

Practical Expedient

To formulate projections that are rational and based on verified accounting details, this so-called practical expedient can be chosen by the entity that assumes its present balance sheet conditions will last for the entire projection time frame. Choosing a practical expedient also implies that an entity’s accounting policy will factor in collection activity past its balance sheet date when gauging expected credit losses. Specifically, under 326-20-30-10C for the practical expedient, during the projection time frame, an entity will maintain the exact circumstances of the balance sheet throughout the rational and data-based projection period.

If a business, for example, has determined a particular client is facing monetary challenges, it would account for its client’s financial issues through projections of estimated expected credit losses for said client, even though it has not impacted the business’ historical loss experience or if the business is up to date as of the balance sheet date.

Accounting Policy Election

Per 326-20-30-10E, when a practical expedient from 326-20-30-10C through 30-10D is chosen by entities for their accounting policy election when projecting credit losses, it signals that the entity factors in collection activity after the balance sheet date, but prior to the date of financial statement issuance. If an entity uses one or both of the practical expedient and/or accounting policy elections, disclosure is mandatory.

Conclusion

Lastly, such advice would be administered on a forward-looking basis, and both of these entities (PCC and FASB) will make the ultimate findings and guidelines of the implementation dates once industry professionals’ comments are considered. However, entities will likely be able to utilize these guidelines sooner.

For eligible companies, these standards could provide greater flexibility and the ability to divert resources to more productive allocations.

Also known as greenhouse gas (GHG) accounting, carbon accounting is a way for managers and analysts to measure a company’s total carbon emissions. 

It’s a comprehensive approach to analyze how a company uses energy for its buildings, offices, conveyances and production processes. Carbon accounting examines firsthand, secondhand and tertiary energy uses.

Environmental, Social & Governance

Looking at ESG standards (Environmental, Social & Governance), it’s not only becoming encouraged, it’s becoming required for businesses, especially for publicly traded businesses. Whether it’s the U.S. Securities and Exchange Commission (SEC) or other governmental agencies in the global economy, these administrative organizations are mandating emission declarations for businesses to account for their carbon emissions. It’s also necessary for third parties (lenders, potential and current investors) to review and analyze a company’s current and past performance, along with industry comparisons.

It’s important to distinguish the differences between carbon and GHG accounting. Carbon accounting only looks at carbon dioxide emissions, while GHG looks at the broader category and illustrates why doing so is important. Businesses look at nitrous oxide and hydrofluorocarbons (HFCs), for example, when accounting for GHGs. However, such measurement is based on the so-called carbon dioxide equivalent or C02e. This helps standardize GHGs into the C02e standard for carbon accounting, giving government and interested parties the ability to measure across a universal standard. Two common uses for this standard are for carbon offsets and credits.  

Calculating Emissions

1. Scope 1 factors in emissions from the company’s directly controlled or owned assets. Examples include factories, production, conveyances, etc.  

2. Scope 2 looks at what the business uses in regard to climate-controlled services for their factories, offices, etc. It also looks at the company’s contracts with power suppliers.

3. Scope 3 factors in indirect emissions the business may incur. This includes commercial commuting activities, investing, how assets are disposed of, etc.    

According to the SEC, Scope 3 emissions must include those “upstream and downstream activities in a company’s value chain” if they’re necessary for investor consideration or if the business has pledged to meet certain metrics for Scope 3 levels.

From there, a business’ activity metrics are calculated according to governmental and industry standards, such as the U.S. Environmental Protection Agency, ISO Standard 14064, or The Climate Registry’s General Reporting Protocol, etc. Businesses’ results are presented against past results, where they discuss how they will improve their efficiency internally and work with their supply chain partners.

Compliance

While compliance is one important reason, third-party audiences, such as family offices, institutional money managers, lenders, etc., are equally as important. Asset managers and family offices, for example, look for ESG or environmentally friendly investments to attract retail or “smart-money” investors. Similarly, activist investors, especially those looking to make companies more environmentally friendly, can look at companies to see how their carbon emissions stack up against their industry and overall commercial peers.

Another consideration is that by meeting regulatory or industry requirements and meeting ESG standards, businesses could qualify for preferential or market rates for funding from the debt markets.

Conclusion

The more companies are well-versed in this type of accounting, the better they will meet government and investor expectations.