Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is an operating metric that shows the annualized value of a company's active recurring contracts at a point in time. It is not defined in US GAAP, is not a GAAP measure, and is not the same as revenue recognized under ASC 606.
Billing
Explanation
There is no authoritative definition of ARR. Each company sets its own, for example monthly recurring revenue (MRR) multiplied by twelve, and decides whether usage fees, discounts, or free periods are included and when new or churned contracts count.
ARR differs from ASC 606 revenue in several ways:
• Timing: ARR is a run rate; revenue reflects performance obligations satisfied during the period.
• Scope: one-time fees, services, and hardware are usually excluded from ARR but are part of revenue.
• Allocation: ASC 606 allocates the transaction price based on standalone selling prices; ARR usually takes contractual prices as they are.
• Contract term: ASC 606 considers only the enforceable term, which can be shorter than the commercial term.
When public companies disclose metrics like ARR in MD&A, SEC guidance expects a clear definition, an explanation of its usefulness and of how management uses it, and consideration of disclosure controls.
Why It Matters
ARR should come from subscription data, for example in SAP Subscription Billing, while revenue comes from the revenue subledger, such as SAP RAR. A documented bridge between the two keeps metrics and accounting apart.
Related Terms
Recurring Billing · Remaining Performance Obligation (RPO) · Deferred Revenue · SAP Subscription Billing · ASC 606
Related Articles
• Billing vs. Revenue: Why Invoices Don't Equal Revenue
• SAP Subscription Billing and RAR: How Subscription Revenue Gets Recognized
• Subscription and Usage-Based Billing: Key Design Decisions
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