How are MRR and recognized revenu accounted for?

What is MRR and the Difference from Revenue Recognition?

MRR (Monthly Recurring Revenue) and revenue recognition are two key concepts for evaluating the financial performance of subscription-based businesses. While both measure recurring revenue, their calculation methods differ, particularly regarding prorating and how MRR is calculated at the end of each month.

1. MRR (Monthly Recurring Revenue)

MRR represents the sum of monthly revenues generated by active subscriptions at a given time. The MRR of a period is calculated based on active subscriptions at the end of that period.

MRR Calculation

MRR is calculated from the invoice lines and the duration of each subscription. The formula used is:

$$MRR=∑(Monthly  value  of  each  active  subscription)$$

or

$$∑(\frac {Subscription  duration  in  months }{Subscription  amount  before  tax​})$$

Each subscription is converted into a monthly value by dividing the total subscription amount by its duration in months. For example, a yearly subscription of €1,200 has a monthly value of €100 (€1,200 ÷ 12 months).

Practical Examples:

• Monthly Subscription: A €50 monthly subscription, active from February 7th to March 7th, contributes €50 to the MRR for February.

• Annual Subscription: A €1,200 yearly subscription, active from January 15th to the following January 15th, contributes €100 to the MRR for each month, from the start to the end of the period.

• Quarterly Subscription: A €450 subscription for 3 months, active from January 10th to April 10th, contributes €150 to the MRR from January to March.

Prorating and Contribution Calculation

MRR is not prorated: This means the entire value of a subscription is accounted for as soon as it is active, even if it starts or ends in the middle of a month.

Example: A customer subscribes for €100 per month on March 15th. The MRR for March will include the full subscription, even though it starts in the middle of the month.

2. Revenue Recognition

Revenue recognition follows strict accounting rules and involves recognizing revenue when it is actually earned, meaning when a service is provided. Unlike MRR, revenue recognition is prorated, meaning it is calculated based on the period during which the service was actually provided.

Recognized Revenue Calculation

The formula for calculating recognized revenue for a subscription is:

$$Recognized  Revenue=Subscription  amount×\frac{Service  days  in  the  month}{Total  days  in  the  month}$$

Example of Prorating: If a customer subscribes for €100 on March 15th for a one-month period, the recognized revenue for March will be €50 (because the subscription covers 15 days in March: €100 × (15/31)).

If the subscription renews for April, the recognized revenue for April would be €100, as the subscription covers the full month. Then €50 for May if it does not renew.

3. Key Differences Between MRR and Revenue Recognition

• Le MRR mesure les revenus récurrents basés sur les abonnements actifs à la fin du mois. Il MRR measures recurring revenue based on active subscriptions at the end of the month. It is calculated on a non-prorated basis: if a subscription starts in the middle of the month, its total value is counted for that month.

• Revenue recognition, on the other hand, is prorated: it adjusts amounts based on the actual duration of the subscription each month.

Summary of Differences:

Criteria	MRR (Monthly Recurring Revenue)	Revenue Recognition
Prorating	No (entire subscription is counted)	Yes (prorated according to service days)
Calculation Period	Calculated at the end of each period (month, quarter)	Calculated as service is provided
Goal	Measure the monthly recurring value of subscriptions	Recognize revenue as it is earned

---