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The short answer: Under U.S. GAAP Topic 606, report revenue gross when your SaaS company controls the specified service before it is transferred to the customer and is therefore the principal. Report revenue net when you merely arrange for another provider to deliver that service and are the agent; in that case, revenue is the fee or commission you expect to keep.
This is a control judgment, not a choice between two presentation styles. A single customer contract can contain services for which you are principal and other services for which you are agent, so the analysis must be performed for each specified good or service.
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What gross and net revenue mean for a SaaS company
Gross presentation records the consideration for a specified service in full as revenue. Costs paid to a third-party provider are recorded separately under the applicable expense guidance. Net presentation records only the amount your company retains for arranging the service—usually a commission, markup or other fee.
The distinction can materially change reported revenue without changing cash collected or gross margin dollars. For example, a platform that bills a customer $120 for software access and a third-party service could show $120 of revenue if it controls both offerings. If it only arranges the third-party service and keeps a $20 commission, it would show $100 of software revenue plus $20 of net service revenue, depending on the contract’s specified services and consideration allocation.
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Topic 606 does not permit management to select the presentation that produces a preferred growth rate. The conclusion follows from whether the entity controls each specified service before transfer.
The governing rule: control before transfer
The Financial Accounting Standards Board issued ASU 2014-09 on May 28, 2014. The standard established principles for reporting the nature, timing and uncertainty of revenue from customer contracts and is codified in Topic 606.
For gross-versus-net purposes, first identify the service promised to the customer. Then determine whether your SaaS entity controls that service before it is transferred. If you do, you are the principal and present the related consideration gross. If you do not control it and instead arrange for another party to provide it, you are the agent and present only the amount you expect to retain.
“Control” is evaluated in the context of the specified service and the transfer to the customer. A contract’s labels—such as “reseller,” “platform,” or “marketplace”—do not decide the accounting. The actual rights, obligations and delivery process do.
Principal (gross) presentation
When gross revenue is appropriate
You are generally the principal when you control the specified service before the customer receives it. Your company may provide the service itself, obtain it from a supplier and then transfer it, or combine supplier inputs into a service you control. The customer is buying your promised output, even if another party performs part of the work behind the scenes.
Gross consideration is recorded as revenue when the performance obligation is satisfied under the contract. Payments to suppliers are not netted against revenue merely because those suppliers help fulfill the obligation.
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Indicators that support a principal conclusion
Topic 606 identifies indicators that help explain the control judgment. They are evidence, not an automatic checklist; no single indicator overrides the substance of the arrangement.
- Primary responsibility for fulfillment: Your company is responsible for delivering the promised service and for the customer receiving an acceptable result. This can include responsibility for service levels, implementation, support, continuity or remediation.
- Discretion in establishing price: You can set or meaningfully influence the amount charged to the customer before the service is transferred. Limited pricing discretion does not by itself settle the question, but broad discretion supports control.
- Inventory or performance risk: You bear risk before or during delivery. In a digital business, this may involve committing to provider capacity, paying for access that might go unused, or bearing the cost of correcting a failed service. Traditional inventory risk is more obvious for physical goods, while performance risk is often more relevant to SaaS.
- Integration or combining activity: You combine a third party’s input with your own software, configuration, support or workflow to create the specified service promised to the customer. The more your activities transform the input into the customer’s requested output, the more important that evidence becomes.
Assess the indicators together and explain how they relate to control of the identified service. The presence of one indicator does not make a company principal automatically, and the absence of one does not prevent a principal conclusion.
Agent (net) presentation
When only the retained fee is revenue
You are the agent when your promise is to arrange for another party to provide the specified service and you do not control that service before transfer. The customer may pay your platform, but collection of cash does not establish control. Your revenue is the fee, commission or markup you expect to retain for arranging the provider’s service.
Amounts collected on the provider’s behalf are not revenue. They are typically recorded as a payable or other balance until remitted, subject to the contract terms and applicable accounting guidance.
Arrangements that commonly require analysis
- Marketplaces: A marketplace may connect a customer with an independent provider. If the provider remains responsible for performing the service and the platform does not control it, the platform generally records its commission rather than the customer’s full payment.
- Reseller arrangements: A reseller can be principal or agent. Buying access and reselling it does not automatically produce gross revenue. Examine who controls the specified service, who bears performance risk and who is responsible to the customer.
- Referral or booking models: If your software only introduces the customer to a provider and the provider supplies the service, the promised service may be an arrangement obligation for which the retained fee is revenue.
Contract facts control the conclusion. Two companies using the same marketplace model can reach different outcomes because their provider agreements, customer promises and responsibilities differ.
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Do not assign one gross-or-net label to an entire contract without identifying its separate specified goods or services. Principal-versus-agent status is assessed for each specified good or service that you promise to the customer.
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Consider a SaaS subscription that includes hosted application access, implementation, customer support and third-party communications. Your company might control the hosted application and implementation, making those components gross. It might merely arrange the communications service, making that component net. The same contract can therefore contain both gross and net revenue.
Document how the promised items are identified, whether a third-party input is integrated into a combined output, and which party controls each item before transfer. Allocation of transaction price and timing of recognition still follow the other Topic 606 requirements; principal-versus-agent analysis determines the amount presented for each specified service.
Gross-versus-net comparison
| Question | Principal (gross) | Agent (net) |
|---|---|---|
| What is the promised role? | Provide or control the specified service before transfer. | Arrange for another party to provide the specified service. |
| What is reported as revenue? | The gross consideration allocated to the specified service. | The fee, commission or other amount expected to be retained. |
| Who is primarily responsible for fulfillment? | Your SaaS company has primary responsibility to the customer. | The other provider is primarily responsible for delivering the service. |
| Who sets the customer price? | Your company has meaningful pricing discretion; this supports, but does not prove, control. | Pricing is set or constrained by the provider or arrangement; this supports, but does not prove, an agency conclusion. |
| Who bears inventory or performance risk? | Your company bears relevant pre-transfer or service-performance risk. | The provider bears the relevant risk and your company earns for arranging access. |
| Are third-party inputs integrated? | Your company combines inputs into the specified service it promises. | The provider’s service is delivered substantially as the provider’s own offering. |
| Can one contract contain this outcome? | Yes. It may apply to some specified services. | Yes. It may apply to other specified services in the same contract. |
A practical principal-versus-agent workflow
Use the following sequence for new contracts and for material changes to existing arrangements. Keep the analysis tied to the actual customer promise rather than to the invoice format or internal product name.
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- Inventory the promises. List every specified good or service promised to the customer, including hosted access, implementation, support, data, communications, payments, content or services delivered by a partner.
- Define each specified service. Describe what the customer is supposed to receive and when it is transferred. If several inputs are combined into one output, explain why the combined output is the specified service.
- Identify the provider chain. Record which party performs each activity, which party contracts with the customer, and whether your company can direct, replace or supplement the provider’s work.
- Assess control before transfer. Ask whether your company controls the specified service before the customer receives it. Do not substitute “we collected the cash” or “we issued the invoice” for this analysis.
- Weigh the indicators. Analyze primary fulfillment responsibility, pricing discretion, inventory or performance risk, and integration of third-party inputs. State facts that support and contradict each possible conclusion.
- Select the presentation. If principal, record the gross consideration allocated to that service. If agent, record only the expected fee or commission.
- Map the conclusion to systems. Configure billing, revenue schedules, cost postings and disclosures so that the accounting treatment matches the documented service-level conclusion.
- Obtain appropriate review. Have the conclusion reviewed under your company’s accounting policy and controls, especially when the arrangement is material, unusual or judgment-sensitive.
- Set a reassessment trigger. Revisit the conclusion when provider responsibilities, pricing rights, service-level commitments, integration, contract terms or delivery arrangements change.
How to document the judgment
A concise memo should allow a reviewer to understand the conclusion without reconstructing the contract from invoices. Include:
- The customer contract, order form and relevant provider agreements.
- A list of specified goods or services and the customer-facing promise for each.
- A process description showing how each service is delivered and when transfer occurs.
- Who is responsible for fulfillment, outages, refunds, replacements, support and regulatory or customer remedies.
- Who sets the price, whether prices can be changed, and how provider compensation is determined.
- Any capacity, minimum-commitment, cancellation, usage or performance risk borne by each party.
- How your software, personnel or workflow integrates third-party inputs into the promised output.
- The gross and net alternatives considered, the evidence supporting each indicator, and the final conclusion for every specified service.
- The effective date, approver, accounting-system configuration and events that would trigger reassessment.
Because the indicators are not a mechanical checklist, the memo should explain the weighting of the evidence. A statement such as “we set the price, therefore we are principal” is incomplete if the provider remains solely responsible for delivering the service and your company has no ability to direct or alter it.
Worked SaaS scenarios
Company-controlled hosted application
A company develops and operates a hosted application, contracts with the customer, provides support and promises uptime. It may use a cloud infrastructure provider, but the customer receives the company’s application service. The company’s responsibility for the promised output and integration of infrastructure into that output support a principal conclusion for the application service. Revenue for that service is presented gross, subject to the normal Topic 606 timing and allocation analysis.
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Independent specialists on a marketplace
A platform lists independent specialists. The specialist contracts to perform the customer’s project, sets or approves the service terms, performs the work and handles remediation. The platform facilitates discovery, payment and messaging and retains a commission. Those facts support an agency conclusion for the specialist’s service; the platform reports its commission, not the customer’s entire project payment.
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A software subscription includes the company’s application and outbound messages supplied by a carrier. The company controls the application, sets the bundle price and provides customer support. The carrier is responsible for transmitting each message, and the company has no obligation to provide transmission if the carrier fails. The application and messaging service should be analyzed separately. The application may be gross while the messaging component may be net if the company does not control transmission before it reaches the customer.
White-label service with substantial integration
A provider supplies a technical engine, while the SaaS company configures it, combines it with proprietary software, promises a single service-level commitment and bears the cost of correcting failures. Those integration and performance obligations may support control of the combined service and gross presentation. The conclusion depends on the detailed contract and operating facts, not on the “white-label” description.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Common mistakes and how to correct them
Using the invoice total as the revenue answer
An invoice can include amounts collected for a provider. Reconcile the invoice to the specified services and the principal-versus-agent conclusion instead of treating billing as proof of gross revenue.
Applying one conclusion to the whole company
A SaaS company can be principal for its core application and agent for an add-on. Create a service-level matrix so that mixed contracts are not forced into a single presentation.
Treating indicators as a scorecard
Counting indicators can obscure the control question. Explain the substance of the customer promise, the transfer process and why the combined evidence supports the conclusion.
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Ignoring provider-agreement changes
A revised provider contract can shift responsibility for outages, refunds, capacity or pricing. Compare the accounting memo with current agreements and trigger reassessment when those rights or obligations change.
Assuming a markup is always gross revenue
A markup can be the agent’s retained commission. Determine whether your company controls the specified service before concluding that the full marked-up amount is revenue.
Failing to separate third-party inputs
Do not automatically net every supplier cost, and do not automatically gross every bundled charge. Identify whether the supplier’s output is a separate specified service or an input to a service your company controls.
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Principal-versus-agent conclusions are areas of significant judgment. They should be supported by consistent accounting policies, contract-review controls and evidence that the recorded presentation matches the current operating model. Review material arrangements when entering a new market, adding a marketplace feature, changing a provider, introducing usage-based pricing or changing customer remedies.
SEC Chief Accountant Wesley R. Bricker stated, “An area of significant judgment does not mean that the standard permits optionality.” The point is practical: judgment requires a reasoned, evidence-based conclusion; it is not permission to select gross or net presentation for convenience.
There is no authoritative prevalence statistic establishing what percentage of SaaS companies report gross rather than net revenue. The appropriate presentation depends on the facts of each specified service and contract.
When to involve technical accounting support
Escalate the analysis when a transaction is material, a provider performs most customer-facing work, the contract includes a broad service bundle, responsibilities are changing, or the financial-statement effect of gross versus net presentation is significant. A technical accounting reviewer can help define the specified services, evaluate the evidence and align the conclusion with the company’s Topic 606 policy and controls.
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