Update on Revenue Recognition Issues Affecting Software Companies
As your software company prepares to implement FASB’s revenue recognition changes, you may be heartened to know that the AICPA’s Software Entities Revenue Recognition Task Force has been working to clarify and resolve a number of potential implementation issues.
As the task force arrives at decisions on these issues, it submits them to the AICPA’s Financial Reporting Executive Committee (FinREC) for review. After the FinREC review process is complete, the issues are aired for public exposure and comment.
Because the task force’s objective is to provide practical hints and illustrative examples of how the new revenue recognition standard is applied for software companies, you may find the information valuable in understanding and using the revised guidance.
Here is an update on the various issues cycling through the review process that are likely to impact your company’s revenue recognition implementation.
Draft revenue recognition implementation issue
The AICPA is seeking public comments on this issue before September 1, 2016. Submit your comments to firstname.lastname@example.org before the due date.
Issue #14-2 — Determining whether components of post-contract customer support (PCS) are separate performance obligations distinct from one another, and the associated pattern in which an entity satisfies each performance obligation
This issue is expected to have a significant impact on the software industry. It discusses whether general categories of PCS, technical support, and unspecified software updates provided on a when-and-if-available basis in an arrangement are “distinct” from the software license and from one another.
For distinct performance obligations, your company must determine how to measure progress towards satisfaction for each; but two or more distinct performance obligations with the same measure of progress toward satisfaction may be treated as a combined performance obligation. (And the standalone selling price of the combined performance obligation may be used rather than determining the standalone selling price for each distinct performance obligation.)
This issue also discusses how to measure the progress toward completion of these performance obligations, based on the pattern of transfer (whether there is a commitment to “stand ready” during the performance period or whether there is an explicit or implied performance period or event), and whether the recognition is over time or at a point in time.
The following issue is out for exposure until September 1, 2016
Issue #2 — Identification and satisfaction of performance obligations
This issue addresses considerations in determining whether components of PCS, as well as licenses, are separate performance obligations when applying the guidance in ASC 606.
Issues submitted to FinRec for review in July 2016
Issue #1 — Determining whether a license in a hosting, SaaS, and hybrid-cloud arrangements are distinct from other goods and services in the arrangement
This issue covers considerations in determining when software intellectual property (IP) is considered highly interdependent or interrelated with other services in an arrangement, and, therefore, not considered distinct within the context of the contract.
Issue #4a — Defining and identifying potential price concessions
This issue discusses sources of information a vendor may use to evaluate, identify, and estimate the value of implied price concessions; how the portfolio approach may be used in this estimation; and how contracts with extended payment terms impact this estimation.
Issue #4b — Estimating the standalone selling price of options that are determined to be performance obligations
This issue provides illustrative examples of methods in ASC 606-10-55-44 and 55-45 to account for options within an arrangement that are determined to be performance obligations because they provide a material right to the customer.
Issue #6 — Determine the transaction price: use of the residual method
This issue addresses when it is appropriate to use the residual approach in estimating the standalone selling price of a software license.
Issue submitted to the Revenue Recognition Working Group
Issue #7 — Determine the transaction price — assessing significance of financing component
This issue discusses considerations for determining whether a significant financing component exists.
Other identified implementation issues
These issues have been submitted to the task force for discussion:
- Issue #8 — Transfer of control of a software license
- Issue #10 — Disclosure: levels of disclosure of disaggregated revenue
- Issue #11 — Estimating standalone selling price including the use of a range to evidence SSP
- Issue #12 — Identify the contract: master service arrangements and purchase orders
- Issue #13 — Determining whether other goods and services (e.g., application management, integration and installation services) in the arrangement are separate performance obligations
The task force is also participating in the development of an accounting guide on the new revenue recognition standard, so look for that additional resource in the coming months.
How we can help
CLA’s software industry practitioners are up to speed on FASB’s revenue recognition changes and the issues currently revolving through AICPA’s overall review process. CLA can help you understand how these changes impact your organization, so that you can adapt to these standards and embrace the changes with confidence.