Last Updated: December, 2023
The Beginning of IoT Subscription data plans:
With the evolution of IoT, new pricing structures emerge, and IoT subscriptions for data plans become more prevalent. These IoT subscriptions are particularly significant for end-user-related IoT devices, such as alarm systems, trail cameras, tracking devices, or SIM cards used for in-car entertainment in the automotive sector.
IoT subscription data plans often include a set amount of data to be consumed within a specific period, such as multi-year, annual, multi-month, or monthly plans. The renewal of these subscriptions occurs either when the included data volume is consumed or the subscription period expires. For a deeper understanding, refer to our previous blogs about IoT Monetization before we delve further into the intricacies of IoT subscriptions.
Challenges in Revenue Recognition of IoT Subscriptions
The revenue recognition for IoT subscriptions is a complex process. Since subscriptions represent a time-bound performance obligation, the revenue cannot be recognized immediately when the customer activates and pays for their selected data plan. Instead, upon signup, the entire revenue for the IoT subscription must be marked as deferred and recognized progressively until the contract’s obligations are met. This poses unique challenges in the realm of mobile data IoT subscriptions, where specific methods are required to satisfy financial auditors’ criteria.
Recognition Methods for IoT Mobile Data Subscriptions
Initially, Freeeway’s simHERO product, offering mobile data IoT subscriptions, employed an even distribution method for revenue recognition. For instance, a 6-month subscription with 60MB of mobile data for 6 Euros was recognized as 1 Euro of revenue per month, assuming equal data consumption over the term. However, this method, though seemingly fair, was not accepted by auditors, prompting a necessary change in our approach to revenue recognition for these IoT subscriptions.
Advanced Revenue Recognition Based on Real IoT Data Consumption
Following feedback from auditors, Freeeway shifted to a revenue recognition process based on actual data consumption percentages for each IoT subscription period. In this approach, revenue is recognized in proportion to the data consumed in each period, a more accurate method for IoT subscription services. This method ensures that if the full data balance is consumed before the subscription term ends, the remaining deferred revenue is recognized accordingly.
Taking our example from above, let us assume that mobile data consumption follows the below pattern:
| Period | Free Balance | Consumed Balance | Deferred Revenue | Recognized Revenue |
|---|---|---|---|---|
| Payment Day | 60 MB | 0 MB | 6.00 Euro | 0.00 Euro |
| 1st Month | 54 MB | 6 MB | 5.40 Euro | 0.60 Euro |
| 2nd Month | 42 MB | 12 MB | 4.20 Euro | 1.20 Euro |
| 3rd Month | 0 | 42 MB | 0.00 Euro | 4.20 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.
Enhancing Efficiency with Automated IoT Subscription Revenue Recognition
Recognizing the complexities of proper revenue recognition for IoT subscriptions, Freeeway automated this process through its IoT Monetization Hub. This solution not only enables customers to manage their IoT subscriptions effectively but also integrates financial tools and reports for seamless interaction with their financial systems. A key feature is the RevRec (Revenue Recognition) Module, designed to ensure audit-proof revenue recognition for any IoT subscription based on mobile data. This automation significantly streamlines the revenue recognition process for companies managing a variety of IoT subscriptions.
Discover more about Freeeway’s Monetization Hub and the RevRec module by consulting with our experts. This system provides a comprehensive solution for handling the complexities of revenue recognition in the growing field of IoT subscriptions.
Summary
This article emphasizes the importance of accurate revenue recognition for IoT subscriptions, detailing the evolution of IoT subscription data plans and the challenges in recognizing revenue for these services. We have outlined how traditional methods, like even distribution, do not suffice for financial auditors, necessitating more sophisticated approaches based on real data consumption. We’ve used our experience to illustrate the complexities of IoT subscription revenue recognition, leading to the development of an automated system within our IoT Monetization Hub. This system, including the RevRec (Revenue Recognition) Module, provides a comprehensive solution for managing and recognizing revenue for IoT subscriptions, ensuring compliance with financial standards and simplifying the process for businesses.
