Revenue Recognition For Software And Technology

With the updated revenue recognitions standards, recognition for software and technology 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/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 changes 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

This course is part one in a two segment series that deals 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.