Topic 606: Revenue Recognition for Software and Technology

Author: Lynn Fountain

With the updated revenue recognition standards, recognition for software and technology is expected to continue to present challenges for 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, FASB and IASB issued largely converged revenue recognition standards. This new guidance replaces virtually all current revenue recognition guidance, including software revenue recognition guidance in ASC 985-605. 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), and other goods or services. The new guidance will change how software entities are recognizing revenue for these contracts in a few notable ways.

ASC 606 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

The new guidance will change how software entities are recognizing revenue for these contracts in a few notable ways. This course is designed to provide insight related to the new revenue recognition standard as it applies to software and technology processes.

Publication Date: March 2019

Topics Covered

• Insight related to the new revenue recognition standard as it applies to software and technology processes
• Overview of changes to RR for software and technology companies
• Five Step Revenue Recognition
• Basic Principles of RR
• Performance Obligations
• Determine Transaction Price
• Recognize Revenue
• Other Uses
• Basic Principles of Revenue Recognition
• Non”software Deliverables in an Arrangement Containing More”than”Incidental Software
• Factor One — More Than Incidental
• Factor Two — Customer Support
• Factor Three — Significant Costs
• Vendor Hosted Licensed Software
• Up Front Fee
• Future Discounts
• Software Components Excluded from Scope of ASC 985”605

Learning Objectives

• Describe changes to revenue recognition for software and technology companies
• Identify the basic principles of revenue recognition for software/technology
• Recognize practices involving revenue recognition and accounting for costs of computer software (ASC 985-605)
• Recognize how to account for non-software deliverables in an arrangement containing more-than-incidental software
• Identify applicability of ASC 985-605 when licensed software is hosted by the vendor
• Recognize how up-front fees impact revenue recognition
• Describe how future discounts impact revenue recognition
• Differentiate if software components are excluded from the scope of ASC 985-605
• Recognize how the current standard view assessment of whether a contract with a customer exists
• Identify and apply the three factors
• Describe software arrangements often included as an element referred to as post-contract support (PCS)

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Accounting (2 hours)

Program Prerequisites
None

Advance Preparation
None