Recognizing Revenue - Revenue May Be Recognized More Quickly Under ASU 2014-09 Relating to the Sale of Software Licenses

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.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2020 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on

OMB Issues Final 2020 Compliance Supplement
Ransomware Postpones First Day of School for Hartford Students
FASB Proposes Changes to the Definitions of Financial Statement Elements
Schneider Downs’ Construction Practice Ranked Once Again
Is Your Chip Card Implementation Secure?
New FISAP Instructions Under the CARES Act

Register to receive our weekly newsletter with our most recent columns and insights.

Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us

contact us

Map of Pittsburgh Office
Pittsburgh

One PPG Place, Suite 1700
Pittsburgh, PA 15222

contactsd@schneiderdowns.com
p:412.261.3644     f:412.261.4876

Map of Columbus Office
Columbus

65 East State Street, Suite 2000
Columbus, OH 43215

contactsd@schneiderdowns.com
p:614.621.4060     f:614.621.4062

Map of Washington Office
Washington, D.C.

1660 International Drive, Suite 600
McLean, VA 22102