ASC 810 explained: Consolidation accounting in SaaS

In SaaS, where acquisitions are common, understanding ASC 810 is crucial for financial reporting. This accounting standard provides the guidelines for consolidating financial statements. But why is it important in SaaS? And what does the process look like?

This article offers a complete guide to ASC 810, with advice tailored specifically for SaaS businesses. We’ll answer the questions stated above and cover the final details to help you remain compliant.

You'll also learn:

• The two primary consolidation models under ASC 810
  
• When a SaaS company needs to consolidate
  
• Key differences between the consolidation models
  
• The importance of consolidation for SaaS companies
  
• How Orb's billing platform can assist with ASC 810 considerations

Let’s get started by providing an in-depth explanation of ASC 810 and its role in SaaS. 

What is ASC 810?

ASC 810 is a key piece of U.S. GAAP that provides guidelines for the consolidation of financial statements. 

It outlines the conditions for assessing controlling financial interests. Conditions may be based on voting rights or other arrangements such as Variable Interest Entities (VIEs).

A quick look at why it matters for SaaS

In SaaS, companies often have a complex web of investments and partnerships. ASC 810 consolidation helps SaaS companies navigate this landscape. It's key for cases involving acquisitions, joint ventures, or VIEs used in financial operations.  

ASC 810 offers two main models for consolidation:

1. The Voting Interest Entity model
   
   
2. The Variable Interest Entity (VIE) model  

We'll dive deeper into these models in the coming section. 

When does a SaaS company need to consolidate?

A SaaS company must consolidate another entity's financials if it has a controlling financial interest. These financials can be assessed in two ways:

Voting Interest model

If the SaaS company owns more than 50% of the voting shares of another entity, it is generally presumed to have control. That means it must consolidate that entity under the Voting Interest model. 

Note: Contractual agreements or other factors could assign control to another party.

Variable Interest Entity (VIE) model

For entities where control is based on contractual deals rather than voting rights, things are more nuanced. This is where the VIE model comes into play.

So, what is a variable interest entity?

In the VIE definition, the equity investors lack enough equity at risk to absorb the entity's expected losses or receive returns. Control becomes dependent on contractual or operational arrangements.

The ins and outs of VIEs

A SaaS company must consolidate a VIE if:

• It has the power to direct the significant activities of the entity.
  
• It absorbs a majority of the risks and rewards (for example, profits or losses).

In essence, the VIE model looks at who's really calling the shots and who's shouldering the bulk of the risks and rewards.

Differences between the consolidation models

As you've learned so far, ASC 810 offers two primary models for consolidation: the Voting Interest Entity model and the VIE model. While both aim to determine control, they differ in their approach and the types of entities they're best suited for.  

Let’s zoom in and look at how these two models differ from one another:

Voting Interest Entity model

The Voting Interest Entity model determines control based on ownership of voting shares in an entity. If a SaaS company owns more than 50% of the voting shares, it is typically deemed to have control and must consolidate the entity into its financial statements.

This model is straightforward in scenarios where control is clear-cut and determined solely by voting rights. However, the structure becomes more nuanced when applied to limited partnerships.

In a limited partnership, there are generally two types of partners:

• General partner: Manages the day-to-day operations and has decision-making authority.
• Limited partners: Primarily invest in the partnership but do not participate in its management.

Control under the Voting Interest Entity model in limited partnerships hinges on the ownership of "kick-out rights." These are rights that allow limited partners to:

1. Remove the general partner from their management role, or…
2. Dissolve the partnership entirely, even without a specific cause.

With its focus on majority ownership, the Voting Interest Entity model applies to straightforward cases where control is directly tied to voting rights or explicit ownership stakes. However, not all entities fit into such clear-cut structures. 

This is where the Variable Interest Entity model comes into play, addressing cases where control is derived from contractual or operational arrangements rather than direct voting power. 

Variable Interest Entity (VIE) model

This model addresses more complex situations where control is not based on direct voting power. Rather, it stems from contractual arrangements or operational influence. 

A VIE is an entity where the equity investors lack the control or risk exposure associated with being the controlling party. 

Control in a VIE lies with the primary beneficiary. This is who has the power to direct the VIE's significant activities. It also absorbs most of the variability in economic performance through contractual arrangements.

When to use each model

The choice between the Voting Interest Entity Model and the VIE Model depends on how control is established. Let’s zoom in:

• Voting Interest model: This model is used when a reporting entity has a controlling financial interest in a corporation. Think through majority ownership or a majority of kick-out rights in a limited partnership. 
  
  For example, if a SaaS company owns more than 50% of the voting shares of another entity, it typically has control and must consolidate that entity. This model is ideal for simple structures where control is clear-cut based on voting rights. 

• VIE model: This model is used when control is not based on voting rights but on contractual or operational arrangements. 
  
  Control in a VIE often lies with an external party that can direct the VIE's noteworthy activities. It absorbs most of the risks and rewards (profits or losses) through contractual arrangements.

Why is consolidation important for SaaS companies?

ASC 810 provides guidance on consolidating the financial statements of multiple entities into a single set of financial statements. This process is crucial for SaaS companies for several reasons:

Transparency for investors

Consolidation offers investors a clear picture of a SaaS company's financial health. By combining the financial results of all controlled entities, consolidation eliminates the need for investors to sift through numerous separate financial statements. 

This clarity is key for making informed investment decisions and assessing the overall performance and risk profile of the SaaS company. 

Plus, consolidated financial statements make it easier to compare the performance of different SaaS companies. They provide a standardized view of financial health, regardless of the number of entities involved.

Regulatory compliance

Compliance with ASC 810 is a requirement for companies that fall under its scope — including those with investments in subsidiaries, joint ventures, or other entities where control needs to be assessed.

This regulation confirms that SaaS companies adhere to US GAAP. It provides a standardized and reliable framework for financial reporting. 

This standardization is crucial for maintaining trust and confidence in the financial markets and ensuring fair representation for all stakeholders. 

Remember: Failure to follow ASC 810 can lead to regulatory scrutiny, financial restatements, and even legal issues. The effect can lead to damage to a company's reputation and investor confidence.

Impact on financial metrics

Consolidation directly impacts a SaaS company's financial metrics. It can affect key performance indicators (KPIs) such as revenue, profitability, and cash flows. 

This impact is important as it influences a company's ability to raise capital, attract investors, and make strategic decisions. Accurate consolidation ensures that these metrics reflect the true economic position of the SaaS company.

By accurately reflecting the financial performance of all entities, consolidation helps management identify areas for improvement, allocate resources effectively, and make data-driven decisions to drive growth and profitability.

Orb gives your accounting system the support it needs

We've explored what ASC 810 is and why it matters for SaaS companies. Now, let's talk about how to ensure accurate billing and financial reporting in SaaS, where recurring revenue models are common.

This is where having a responsive and accurate billing platform becomes essential. The answer? Orb. 

Orb is a done-for-you billing platform. It helps businesses optimize their recurring revenue strategies. Whether you're a startup or an enterprise, Orb provides the flexibility and features you need to manage your billing processes.

Here's how Orb can support your accounting system and help you stay on top of ASC 810 considerations:

• Accurate revenue recognition: Orb helps simplify compliance with ASC standards. It can handle complex revenue recognition scenarios. Think prepaid credit burndowns and mid-month bill cycle dates. Orb confirms accurate revenue reporting and helps reduce the risk of non-compliance.
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• Usage tracking: Orb tracks every billable event, offering a clear audit trail and creating invoices for your customers. This level of detail is key for keeping transparency and helping you comply with various accounting requirements.
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• Flexible pricing structures: Orb allows you to create and manage a variety of pricing models. These models include usage-based, tiered, and subscription-based pricing. This level of flexibility is key for adapting to the evolving needs of your SaaS business and providing revenue allocation under ASC 810.
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• Integrations: Orb integrates with popular accounting software and data warehouses. It facilitates your billing operations and reduces manual data entry. This integration helps secure data consistency. It also reduces the risk of errors that could impact your consolidation reporting under ASC 810.
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• Real-time analytics: Orb provides reports and real-time insights into your revenue streams. Our reports help you make decisions about your pricing, customer segmentation, and financials. All while staying compliant with ASC 810.

Ready to unlock the full potential of your recurring revenue strategy while providing accurate and compliant financial reporting? 

Consult our flexible pricing options to find a plan that aligns with your business needs.