Published: September, 2022
With the updated revenue recognition standards, recognition for software and technology is expected to continue to present challenges for FS preparers.
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.
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. The new guidance will change how software entities are recognizing revenue for these contracts in a few notable ways.
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 the 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:
ASC 606 provides a more defined structure for assessing all revenue transactions and consists of five elements:
This CPE Accounting webinar is part one 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.
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