Revenue Recognition: Principles, Changes, and Practices

Learning Objectives

• To review the changes to the revenue recognition process for software and technology and companies that deal in this industry.
• To identify the basic principles of revenue recognition for software and technology and companies that deal in this industry. 
• To discuss the five-step process of revenue recognition using software and technology as an example
• To analyze the practices involving revenue recognition and accounting for costs of computer software. 

Course Description

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:

• Software licenses
• Software-as-Services (SaaS)
• Post-contract customer support (PCS) 
• Other goods or services. 

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

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. 

Have a look at Revenue Recognition Certificate Course, we have on our website authored by Lynn Fountain.

Overview

• Five step RR process

  11 mins
• Contract acquisition costs

  16 mins
• Five step process

  25 mins
• Identify PO in the contract

  44 mins
• Basic principles of RR

  64 mins
• Short term rights of return

  75 mins