What it is
ARR is not GAAP revenue. It is the annualized value of active recurring subscription contracts under a documented company policy — used so growth and retention can be compared across months and board cycles.
A durable ARR definition states what counts (subscriptions, committed usage, multi-year discounts) and what does not (one-time professional services, non-recurring fees).
How it’s calculated
Most teams annualize monthly recurring value (MRR × 12) or sum contract ARR for active logos at period end. Multi-year deals need an explicit discount and timing rule so the same contract does not swing ARR every close.
- Start from a certified customer × product schedule for the period
- Apply inclusion rules (usage, prepaid, free seats) the same way every month
- Reconcile ending ARR to the waterfall bridge before board freeze
Where it breaks
ARR breaks when billing, CRM, and finance each invent a different “active contract” list — or when usage overages quietly enter ARR without a policy. It also breaks when teams swap ARR and GAAP revenue in the same slide without a bridge.
In the board pack
ARR is the headline operating metric: ending ARR, net new ARR, and the waterfall that explains the bridge. Pair it with GAAP revenue when accounting and operating views diverge. See also billing ARR vs CRM ARR.