This course is part two in a two segment series that will deal with revenue recognition for software and technology companies. It is designed to provide insight related to the new revenue recognition standard as it applies to software and technology processes.
With the updated revenue recognition standard, recognition of revenue for software and technology companies is expected to continue to present challenges for financial statement (FS) preparers. Ways of doing business continue to evolve as do the views of the standard setters and regulators. It is imperative that any company required to apply the software revenue recognition standards be thoroughly knowledgeable of the guidance.
In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued largely converged revenue recognition standards. This new guidance replaces virtually all current revenue recognition guidance, including software revenue recognition guidance in Accounting Standards Codification (ASC) Subtopic 985-605, Software—Revenue Recognition. The accounting change will be especially notable for software and technology companies and may require modification to systems, processes, controls and documentation to meet the new requirements.
Most companies in the software industry will be significantly affected. The level of modification to current revenue recognition practices will depend on the nature of the company’s revenues.
Those companies with software license revenue will be most affected. There will be a lesser impact on the recognition of software-as-a-service (SaaS) revenue.
Software companies’ arrangements with customers often include multiple components wrapped into one contract. These could include:
- Software licenses
- Software-as-Services (SaaS)
- Post-contract customer support (PCS)
- Other goods or services.
The new guidance will change how software entities are recognizing revenue for these contracts in a few notable ways.
Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers, provides a more defined structure for assessing all revenue transactions and consists of five elements:
- Identify the contract with a customer
- Identify the performance obligations (promises) in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize the revenue when (or as) the reporting organization satisfies the performance obligations
Resources Consulted:
• ASC 606-10-32-15 to 32-20, 55-244 to 55-246.
• ASU 2014-09: “Revenue from Contracts with Customers.” BC229-BC247.
• Croner-I, “A14 Revenue from Contracts with Customers.” (2019). Section 7.4.2-2 and 7.4.2-2.
• FASB, ”Revenue Recognition Implementation Q&As.” January 2020). Questions 31-37.
• FASB TRG Memo 20: “Significant Financing Components.” 26 January 2015.
• FASB TRG Memo 30: “Significant Financing Components.” 30 March 2015.
• EY, Financial Reporting Developments: “Revenue from contracts with customers.”January 2020. Section 5.5.
• KPMG, Handbook: “Revenue Recognition.”December 2019. Section 5.5.
• PWC, “Revenue from contracts with customers”March 2020. Section 4.4.
• https://www.revenuehub.org/
Learning Objectives
- Discover how to account for non-software deliverables in an arrangement containing more-than-incidental software.
- Recognize the applicability of the revenue recognition (RR) guidance when licensed software is hosted by the vendor.
- Discover how up-front fees impact RR.
- Discover how future discounts impact RR.
- Recognize which software components are excluded from the scope of the new RR guidance.
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Prerequisites
No Advanced Preparation or Prerequisites are needed for this course. However, it is recommended to take the other course in the series prior to completing this one.
Education Provider Information
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