The Importance of Revenue Recognition for IoT Subscriptions

The Beginning of IoT Subscription data plans:

With the evolution of IoT, new pricing structures emerge, and subscription data plans become more popular. This is especially the case for end-user-related IoT devices, such as alarm systems, trail cameras, any kind of tracking devices or even SIM cards used for in-car entertainment in the automotive.

Subscription data plans consider a certain data amount to be consumed within a specific period of time. These timelines can be multi-year / annual / multi-month or monthly ones. Usually, a subscription gets renewed either when the included data volume gets consumed or when the subscription period expires. But what happens after all the data is used or the period simply ends? Catch up with our previous blogs on the subjects before we dive deep into the topic.

What is the matter with IoT subscriptions’ revenue recognition?

As subscriptions are a timely performance obligation, the revenue cannot be recognized when the customer activates and pays for the data plan they select. In contrast, upon signup, the entire revenue has to be marked as deferred revenue and be recognized over time until the contract’s performance obligation is fulfilled. But this is not an easy task with mobile data subscriptions; actually, there is only one method approved by financial auditors.

Recognition methods of mobile data subscriptions

When we started at Freeeway, our simHERO product, which essentially provides mobile data subscriptions, we started recognizing revenues from an even distribution method. To explain this method with a clear example: when you sell a 6-month subscription including 60MB of mobile data consumption for 6 Euros, we recognize 1 Euro of revenue per month, assuming that the mobile data consumption is equally distributed during the term. This, at the time, seemed to be a fair assumption of revenue recognition for our services. But when talking to our auditors, we learned that this way which appeared too simply was not yet a valid method to recognize revenues. Hence, we have been forced to change our revenue recognition method and start basing it on real data usage.

Revenue recognition based on real-data consumption

After our auditors’ feedback, we began to implement a process where revenue recognition is established based on the % of the real data consumption in the actual period (month). Taking our example from above, let us assume that mobile data consumption follows the below pattern:

PeriodFree BalanceConsumed BalanceDeferred RevenueRecognized Revenue
Payment Day60 MB0 MB6.00 Euro0.00 Euro
1st Month54 MB6 MB5.40 Euro0.60 Euro
2nd Month42 MB12 MB4.20 Euro1.20 Euro
3rd Month042 MB0.00 Euro4.20 Euro

In this example, it is assumed that even if the subscription term is 6 months, the entire balance is consumed in month 3. Hence, the remaining deferred revenue is recognized in month 3.

Mobile Data Revenue Recognition & System Implications

To implement such a revenue recognition system, the application needs to track the consumed data volume per period for each balance and relate it to the initial subscribed balance. This information is used to create a revenue recognition report for each individual subscription that any accounting system can use to handle the proper revenue recognition in a given period for the companies entire subscription business.

Automated IoT Mobile Data Revenue Recognition Solution

As we went through the pain chain of proper revenue recognition with our simHERO product, we decided to automate this process entirely. As a result, Freeeway’s IoT Monetization Hub not only provides our customers the capability to create their own IoT subscription business but also provides the financial tools and reports to interact with their own financial systems. One key component is the RevRec (Revenue Recognition) Module that enables audit-proof revenue recognition for any defined IoT subscription based on mobile data.

Learn more about Freeeway’s Monetization Hub and our RevRec module by getting in contact with our experts.

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