Software revenue recognition rules and postcontract support. How to account for the sales of software licenses with. Practical applications of asc 606 for saas companies fei. Software licensing is generally treated for accounting purposes as a sale or licensing of a product. While your customers may pay you a lump sum upfront for a years worth of usage, you wont be able to categorize that. Revenue recognition for software licenses accountingweb. The list will be updated as the task force continues it discussions. The sops basic principle in software revenue should be recognized at the time the software is delivered.
This is because according to the gaap software revenue recognition rules, revenue can only be recognized upon delivery if fair value has been established for each element within a contract. Several revenue issues are topics of concern, as changes to these specific revenue areas could have a significant impact on a companys cash tax position and the timing of recognition. The sec expects registrants to consider these discussions in applying the new guidance as they may provide helpful insight. Technology spotlight the future of revenue recognition deloitte.
The revenue recognition transition resource group trg and the aicpas software revenue recognition task force have discussed various implementation issues impacting companies across many industries. Typically, the line items for revenue recognition in include licence fee which is broken. Software the primary authority for software revenue recognition is aicpa statement of position sop no. New revenue guidance implementation in the software industry. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. The accounting literature on revenue recognition includes both broad conceptual discussions as well as certain industryspecific guidance. Recurring revenue recognition issues in software companies determining the right accounting literatureto. For example, a company receives an annual software license fee paid out by a customer upfront on the january 1. Revenue recognition is vital to correctly determine the financial health of your company, and you still need to recognize your revenue only when you earn it.
The fasb asked the aicpa to pursue the revenue side of the project after the aicpa published an issues paper on software revenue recognition in april 1987. Revenue recognition software could also boost companies profitability, according to reports published around the time of the fasb changes. Software license arrangements can be organized as a hosting arrangement, saas, a hybrid of both hosting and saas, or direct delivery to the customerall of which have different implications for the application of each of the five steps of the new revenue recognition model. Revenue recognition challenges in the software industry. Revenue recognition, commonly referred to as rev rec or revenue rec, is an accounting principle and a process for reporting revenues by recognizing the monetary value of a transaction or contract over a period of time as the revenue is earned. For a discussion of the key considerations for technology entities that do not currently apply software guidance, refer to our applying ifrs, the new revenue recognition standard technology january 2015 technology. For example, an entity may license software, perform installation services, and provide unspecified. Licensing, selling, leasing, or otherwise marketing. The impact of the new revenue recognition guidance on cloud. Introduction overview in october 1997, the american institute of certified public accountants aicpa adopted a new set of guidelines for revenue recognition in software. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Revenue recognition accounting for software as a service saas an executive webcast with jeffrey werner 1. For a saas or subscription business, revenue recognition can be complex, mainly because of the serviceoriented nature of the product. New guidelines for software revenue recognition practical pointers in providing guidance to clients part 1 i.
Does anybody know how to treat up front revenue paid for a software license. The collectibility of the licensing fee is assumed to be reasonably assured. Its almost twice as long as the first edition, with more examples and discussion of the areas that companies have found most complex, as well as the latest iasb and fasb developments. Revenue recognition accounting for software as a service. Will there be any changes to the timing of your revenue recognition. The standard has broad implications and may affect many parts of your organization.
Commencing the data conversion services prior to golive shifts the dates of revenue recognition but should not alter the method of revenue recognition. Revenue recognition and saas accounting for subscription. Often revenues will be recognized upon transferring control of initial goods or services to a customer, with some portion of the arrangement fee deferred until the new feature is released. The software is deliverablenothing needs to be done to complete or modify it before delivery. Revenue recognition issues are looked at on an arrangement basis rather. Entities that license software to customers may need to determine whether they. More than 80% of the companies also invoiced at the point of recognition of the revenue. The new standard presents a unique opportunity for taxpayers to revisit their tax methods for revenue recognition to not only ensure compliance with the tax rules, but also to take advantage of tax opportunities and planning around revenue recognition. Income earned by a company for allowing its ed or patented material to be used by another company. Typically, the line items for revenue recognition in include licence fee which is broken down further to initial license fee or a capacity license fee, implementation and customization fee, annual maintenance support fee. That include software elements a consensus of the fasb emerging issues. Revenue recognition is a generally accepted accounting principle gaap and a fundamental aspect of the accrual basis of saas accounting. In a software license agreement the license fee allocated to software cannot be. The timing of revenue recognition for unspecified software updates or upgradesenhancements and professional services will be similar to today sales or usagebased fees promised in exchange for a software license will typically not be subject to.
The new revenue standards asc 606 and ifrs 15, revenue from contracts with customers replace industryspecific. Softrax provides superior experience, knowledge, products, and services to address your companys asc 606 needs. Software revenue recognition journal of accountancy. Fasb updated revenue recognition guidelines for the amount and. In short, revenues related to these contracts were previously recognized ratably over the length of the contract but now may be accelerated under asc 606. This is not much of a change from what weve discussed above, but rather a much more clear stepbystep definition of rules for revenue recognition that can be easily applied across all businesses. Aug 26, 2016 regulations update on revenue recognition issues affecting software companies.
Detailed rules on software license revenue recognition bi101. The complete guide to saas revenue recognition with asc 606. Abstract the accounting standards committee of the american institute of certified public accountants issued a paper to the financial accounting standards board on the recognition of revenue on the sale and licensing of computer software. If the providers warranty for the software is not shortterm and routine, that fact can jeopardize the providers ability to recognize all the license revenue immediately. For example, the two software development companies examined in this paper, computer associates and microsoft, product sale as a percentage of revenue of 2000 is 94% and 88%, respectively. Revenue recognition for saas andor term subscription businesses. The high proportionate elements of the revenue recognition highlights two conflicting purposes in revenue recognition from sale of software products.
An entity shall recognize revenue when or as the entity satisfies a performance obligation by transferring a promised good or service that is, an asset to a customer. Revenue recognition for software companies softrax industry. The timing of revenue recognition for unspecified software updates or upgradesenhancements and professional services will be similar to today. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos some of the common significant themes associated with its application by entities in the software and software asaservice saas sectors, using insights and perspectives learned in the past year. Sop 972, software revenue recognition, provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software.
In general, the portion of the arrangement fee allocated to pcs is recognized ratably. May 03, 2016 recognize revenue when or as the reporting organization satisfies a performance obligation. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the impact of the new standard to revenue arrangements common to software companies. Nine areas impacted by revenue recognition for software and saas.
Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and software related transactions. Mar 08, 2018 software license arrangements can be organized as a hosting arrangement, saas, a hybrid of both hosting and saas, or direct delivery to the customerall of which have different implications for the application of each of the five steps of the new revenue recognition model. Asc 606 is a revenue recognition standard that will impact the software industry, particularly companies that offer onpremise subscription licenses over a finite, multiyear period. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos some of the common significant themes associated with its application by entities in the software and software asaservice saas sectors, using insights and perspectives learned in the past year as public.
Perpetual licenses and software license revenue recognition. It applies to both public companies according to sab 104 and private enterprises. Software companies are often tasked with deconstructing the typical. According to sab 104 and software license revenue recognition rules, revenue for both perpetual and time based licenses can be recognized when the licenses are delivered as long as a firm has satisfied the following rules. If fair value has not been established on each element, then all revenue needs to be deferred until the contract is complete.
The revenue recognition principle is a cornerstone of accrual accounting together with the. Saas companies frequently encounter challenges in applying the new guidance, including. Applying the new accounting for revenue recognition. Under current guidance, firm a would allocate a contract including deliverables within and outside the scope of software revenue recognition between software and nonsoftware components using the relative selling price method based on the multipleelement arrangement guidance in asc subparagraph 60525153a. No problem, you have the contract and you quote your selling price clearly. Update on revenue recognition issues affecting software. Many companies have been surprised at the length and complexity of the assessment and implementation phases for the new revenue. For accounting purposes, saas subscription revenues should be considered nonrefundable upfront fees. Revenue recognition software helps tech vendors meet. When the license is required for a customer to benefit from a related service e. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the impact of the new standard to revenue arrangements common.
Accounting impact wide and potentially very significant effects on the timing and profile of revenue and profit recognition in comparison with current. Software licensing versus saas the revenue and cost recognition rules that different than the accounting rules that software licensing companies employ. For functional intellectual property software, biological compounds or drug formulas, and completed media content, such as films, tv shows, or music, the nature of the entitys promise is to provide a right to use the entitys intellectual property as that intellectual property exists at the point in time the license is granted unless the entity is expected to undertake activities. Comapny financial year end is june 2011, the company raises an invoice in dec 2010 the licnese is paid in full in dec 10 also for a license agreement that runs from the 01012011 to the 31122011. The new revenue recognition guidelines dont contain severe penalties for committing to specified features in future product releases. Improve comparability of revenue recognition practices across entities. The challenges can arise from the sales process, the volume complexity of the sales transactions, the number of inputs required in the revenue process, or from the appropriate accounting standards that apply to your business. Fundamentals in software revenue recognition grant thornton lynne triplett, accounting principles partner. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. Implementing the new revenue guidance in the technology industry.
Sales or usagebased fees promised in exchange for a software license will typically not be subject to the general guidance on variable consideration. Classifying settlement proceeds and ip licenses by noah webster 2018jan19 in the second part of this twopart series on the asc 606, litigation columnist noah webster delves into the considerations for recognizing revenue from settlement contracts, the two distinctions of ip licenses, and more. Should the revenue from these fees be recognized upon contract. Ninetyday warranties for software licenses seem to be accepted as routine. Some examples of things that may be licensed include songs, sports. The financial accounting standards board fasb recently issued final guidance on accounting for licenses of intellectual property and identifying performance obligations in its new revenue recognition standard. In january 2018, the new revenue recognition standard update no.
Therefore, assuming all other revenue recognition criteria have been met, it would be recognized on august 31. Jul 25, 2017 software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. This is doubly so in subscriptionbased businesses where the financial accounting standards board fasb currently doesnt have any specific standards for saas. Greg fairbanks is a tax managing director with grant thornton llp in washington. All that is required is for the delivery to take place. Mar 22, 2016 regulations new revenue recognition standard means big changes for software companies. Under current guidance, license renewals are generally recognized when the parties agree to the renewal and the fee is received or collection of the amount is probable. The difference between the total contract value and the amounts deferred i. Assuming that after the revenue allocation is performed according to sop 972 where vendorspecific objective evidence vsoe. There are accounting software that are trying to solve the problem of. Under the new revenue recognition guidelines, company a would likely decide to recognize revenue attributed to the term license at the point in time when the software is transferred to the customer, while the revenue associated with the updates would be recognized over time. Under this method, the full fair value, as indicated by vsoe, of the undelivered products and services is deferred.
In a subscription model, all these are bundled into a subscription fee. These include advance payments, percentage of completion, licenses of intangible property, and sales of inventory. Proper revenue recognition for subscription businesses for finance operations, one of the most menial and time consuming tasks is revenue recognition. Aug 02, 20 perpetual licenses and software license revenue recognition.
Historically, xlog issues around 12 software upgrades per year, but the. New revenue recognition standard means big changes for. Below is a list of potential revenue recognition implementation issues identified by the software entities revenue recognition task force. Companies who sell their software by subscription software asaservice or saas need to be particularly careful to ensure they are revising their policies appropriately for the new guidance. What does the new revenue recognition standard mean for tax. Introduction the focus of part 2 of this article is on the practical steps that a lawyer should consider taking in preparing software agreements and the related policies and procedures to be considered by a software company in view of the new software revenue recognition guidelines, sop 972 the new sop. Fasb issues guidance on licensing and performance obligations. Recognizing revenue can be particularly challenging in the software industry. Revenue recognition for software companies softrax. While your customers may pay you a lump sum upfront for a years worth of usage, you wont be able to categorize that entire amount of cash as revenue right away. Revenue recognition within the software industry has historically been highly complex with much industryspecific guidance. Good revenue recognition software can therefore be a changemanagement tool to transform traditional independent software vendors isvs from the perpetual license business to the cloud business, he said. Accounting for the sales of software licenses with subsequent. If a license is deemed to not be distinct during this analysis, the license is combined with the other goods or services and the combined performance obligation is accounted for using the general revenue recognition model.
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