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ASU 2014-09, Revenue from Contracts with Customers, will have a significant effect across all industries; however, the software industry is likely to see situations in which revenue may be recognized earlier upon implementation of the new standard. The following example of a software license sale illustrates this situation.
In a software licensing arrangement whereby payment for the license is paid over a period greater than 12 months, companies have historically followed the extended payment rules within Financial Accounting Standards Codification 985-605-25-33 and 34. Under the extended payment terms rule, a company was not permitted to recognize revenue from the sale of a software license until the payment was due from the customer. Because it is assumed that the software’s value may be reduced due to the subsequent introduction of new or enhanced products during the time period in which the customer is obligated to pay for the software, it is more likely that a vendor will provide a refund or price concession to a customer when the payment term is substantially longer. In this scenario, the transaction price is not deemed to be fixed or determinable; therefore, the four criteria for revenue recognition under existing GAAP are not met.
What does this mean? This means that even if a company fulfilled its obligation and collection is reasonably assured, a company could not recognize revenue until the payment was received.
So how would this change under ASU 2104-09? If the delivery of the software license is deemed to be a separate performance obligation, then revenue would be recognized upon the transfer of control of the software. This may occur prior to receiving payment from the customer.
This is only one scenario in which a company may be able to recognize revenue earlier under ASU 2014-09 than it would have historically been able to under existing GAAP.
For more information on revenue recognition, sale of software licenses or ASU 2014-09, contact us.