Historically, xlog issues around 12 software upgrades per year, but the. The timing of revenue recognition for unspecified software updates or upgradesenhancements and professional services will be similar to today sales or usagebased fees promised in exchange for a software license will typically not be subject to. It applies to both public companies according to sab 104 and private enterprises. Mar 22, 2016 regulations new revenue recognition standard means big changes for software companies. This is because according to the gaap software revenue recognition rules, revenue can only be recognized upon delivery if fair value has been established for each element within a contract.
All that is required is for the delivery to take place. New guidelines for software revenue recognition practical pointers in providing guidance to clients part 1 i. Software licensing versus saas the revenue and cost recognition rules that different than the accounting rules that software licensing companies employ. Revenue recognition within the software industry has historically been highly complex with much industryspecific guidance. Software revenue recognition rules and postcontract support. More than 80% of the companies also invoiced at the point of recognition of the revenue. Proper revenue recognition for subscription businesses for finance operations, one of the most menial and time consuming tasks is revenue recognition. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos some of the common significant themes associated with its application by entities in the software and software asaservice saas sectors, using insights and perspectives learned in the past year as public. The revenue recognition principle is a cornerstone of accrual accounting together with the. For example, an entity may license software, perform installation services, and provide unspecified. Sop 972, software revenue recognition, provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software. For functional intellectual property software, biological compounds or drug formulas, and completed media content, such as films, tv shows, or music, the nature of the entitys promise is to provide a right to use the entitys intellectual property as that intellectual property exists at the point in time the license is granted unless the entity is expected to undertake activities. When the license is required for a customer to benefit from a related service e. The sec expects registrants to consider these discussions in applying the new guidance as they may provide helpful insight.
In a subscription model, all these are bundled into a subscription fee. Accounting for the sales of software licenses with subsequent. Jul 25, 2017 software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Under the new revenue recognition guidelines, company a would likely decide to recognize revenue attributed to the term license at the point in time when the software is transferred to the customer, while the revenue associated with the updates would be recognized over time. Revenue recognition for software licenses accountingweb. Greg fairbanks is a tax managing director with grant thornton llp in washington. Companies who sell their software by subscription software asaservice or saas need to be particularly careful to ensure they are revising their policies appropriately for the new guidance. Nine areas impacted by revenue recognition for software and saas. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and software related transactions. Recurring revenue recognition issues in software companies determining the right accounting literatureto. If fair value has not been established on each element, then all revenue needs to be deferred until the contract is complete. If the providers warranty for the software is not shortterm and routine, that fact can jeopardize the providers ability to recognize all the license revenue immediately. Implementing the new revenue guidance in the technology industry. Software the primary authority for software revenue recognition is aicpa statement of position sop no.
While your customers may pay you a lump sum upfront for a years worth of usage, you wont be able to categorize that. If a license is deemed to not be distinct during this analysis, the license is combined with the other goods or services and the combined performance obligation is accounted for using the general revenue recognition model. New revenue recognition standard means big changes for. The financial accounting standards board fasb recently issued final guidance on accounting for licenses of intellectual property and identifying performance obligations in its new revenue recognition standard. The revenue recognition transition resource group trg and the aicpas software revenue recognition task force have discussed various implementation issues impacting companies across many industries. The high proportionate elements of the revenue recognition highlights two conflicting purposes in revenue recognition from sale of software products. The challenges can arise from the sales process, the volume complexity of the sales transactions, the number of inputs required in the revenue process, or from the appropriate accounting standards that apply to your business. According to sab 104 and software license revenue recognition rules, revenue for both perpetual and time based licenses can be recognized when the licenses are delivered as long as a firm has satisfied the following rules. Update on revenue recognition issues affecting software. Aug 26, 2016 regulations update on revenue recognition issues affecting software companies. No problem, you have the contract and you quote your selling price clearly. Fasb updated revenue recognition guidelines for the amount and. Introduction the focus of part 2 of this article is on the practical steps that a lawyer should consider taking in preparing software agreements and the related policies and procedures to be considered by a software company in view of the new software revenue recognition guidelines, sop 972 the new sop.
Sales or usagebased fees promised in exchange for a software license will typically not be subject to the general guidance on variable consideration. These include advance payments, percentage of completion, licenses of intangible property, and sales of inventory. Revenue recognition is a generally accepted accounting principle gaap and a fundamental aspect of the accrual basis of saas accounting. There are accounting software that are trying to solve the problem of. The fasb asked the aicpa to pursue the revenue side of the project after the aicpa published an issues paper on software revenue recognition in april 1987. Aug 02, 20 perpetual licenses and software license revenue recognition.
The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. Saas companies frequently encounter challenges in applying the new guidance, including. Revenue recognition is a critical piece of accounting for any business, and compliance with official standards is not optional. The impact of the new revenue recognition guidance on cloud. The accounting literature on revenue recognition includes both broad conceptual discussions as well as certain industryspecific guidance. Ninetyday warranties for software licenses seem to be accepted as routine. If the proposal is finalized, the revenue recognition standard will take effect in 2018 for. The software is deliverablenothing needs to be done to complete or modify it before delivery. In general, the portion of the arrangement fee allocated to pcs is recognized ratably. The list will be updated as the task force continues it discussions. The new revenue recognition guidelines dont contain severe penalties for committing to specified features in future product releases.
Accounting impact wide and potentially very significant effects on the timing and profile of revenue and profit recognition in comparison with current. Softrax provides superior experience, knowledge, products, and services to address your companys asc 606 needs. Good revenue recognition software can therefore be a changemanagement tool to transform traditional independent software vendors isvs from the perpetual license business to the cloud business, he said. Revenue recognition software helps tech vendors meet. For a discussion of the key considerations for technology entities that do not currently apply software guidance, refer to our applying ifrs, the new revenue recognition standard technology january 2015 technology. Many companies have been surprised at the length and complexity of the assessment and implementation phases for the new revenue. Under current guidance, license renewals are generally recognized when the parties agree to the renewal and the fee is received or collection of the amount is probable. Revenue recognition challenges in the software industry. Improve comparability of revenue recognition practices across entities. Comapny financial year end is june 2011, the company raises an invoice in dec 2010 the licnese is paid in full in dec 10 also for a license agreement that runs from the 01012011 to the 31122011. In short, revenues related to these contracts were previously recognized ratably over the length of the contract but now may be accelerated under asc 606. New revenue guidance implementation in the software industry. Income earned by a company for allowing its ed or patented material to be used by another company.
Perpetual licenses and software license revenue recognition. How to account for the sales of software licenses with. For example, a company receives an annual software license fee paid out by a customer upfront on the january 1. Revenue recognition is vital to correctly determine the financial health of your company, and you still need to recognize your revenue only when you earn it.
Revenue recognition, commonly referred to as rev rec or revenue rec, is an accounting principle and a process for reporting revenues by recognizing the monetary value of a transaction or contract over a period of time as the revenue is earned. Several revenue issues are topics of concern, as changes to these specific revenue areas could have a significant impact on a companys cash tax position and the timing of recognition. Revenue recognition accounting for software as a service saas an executive webcast with jeffrey werner 1. While your customers may pay you a lump sum upfront for a years worth of usage, you wont be able to categorize that entire amount of cash as revenue right away. The standard has broad implications and may affect many parts of your organization. This is doubly so in subscriptionbased businesses where the financial accounting standards board fasb currently doesnt have any specific standards for saas. In january 2018, the new revenue recognition standard update no. Technology spotlight the future of revenue recognition deloitte. Therefore, assuming all other revenue recognition criteria have been met, it would be recognized on august 31. In a software license agreement the license fee allocated to software cannot be. Some examples of things that may be licensed include songs, sports. Software licensing is generally treated for accounting purposes as a sale or licensing of a product. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software.
An entity shall recognize revenue when or as the entity satisfies a performance obligation by transferring a promised good or service that is, an asset to a customer. The collectibility of the licensing fee is assumed to be reasonably assured. Licensing, selling, leasing, or otherwise marketing. Those companies with software license revenue will be most affected, while. This is not much of a change from what weve discussed above, but rather a much more clear stepbystep definition of rules for revenue recognition that can be easily applied across all businesses. Fasb issues guidance on licensing and performance obligations.
Revenue recognition issues are looked at on an arrangement basis rather. Typically, the line items for revenue recognition in include licence fee which is broken. The new standard presents a unique opportunity for taxpayers to revisit their tax methods for revenue recognition to not only ensure compliance with the tax rules, but also to take advantage of tax opportunities and planning around revenue recognition. Assuming that after the revenue allocation is performed according to sop 972 where vendorspecific objective evidence vsoe.
The new revenue standards asc 606 and ifrs 15, revenue from contracts with customers replace industryspecific. Revenue recognition software could also boost companies profitability, according to reports published around the time of the fasb changes. The sops basic principle in software revenue should be recognized at the time the software is delivered. Revenue recognition for software companies softrax. Entities that license software to customers may need to determine whether they. Under current guidance, firm a would allocate a contract including deliverables within and outside the scope of software revenue recognition between software and nonsoftware components using the relative selling price method based on the multipleelement arrangement guidance in asc subparagraph 60525153a. Should the revenue from these fees be recognized upon contract. Abstract the accounting standards committee of the american institute of certified public accountants issued a paper to the financial accounting standards board on the recognition of revenue on the sale and licensing of computer software. Introduction overview in october 1997, the american institute of certified public accountants aicpa adopted a new set of guidelines for revenue recognition in software. For a saas or subscription business, revenue recognition can be complex, mainly because of the serviceoriented nature of the product. Is it complete or does it require constant updates. Software license arrangements can be organized as a hosting arrangement, saas, a hybrid of both hosting and saas, or direct delivery to the customerall of which have different implications for the application of each of the five steps of the new revenue recognition model. It should be applied by all entities that earn such revenue. Software revenue recognition journal of accountancy.
Will there be any changes to the timing of your revenue recognition. Revenue recognition for software companies softrax industry. For accounting purposes, saas subscription revenues should be considered nonrefundable upfront fees. Typically, the line items for revenue recognition in include licence fee which is broken down further to initial license fee or a capacity license fee, implementation and customization fee, annual maintenance support fee. Detailed rules on software license revenue recognition bi101. New guidelines for software revenue recognition practical. Revenue recognition and saas accounting for subscription. Practical applications of asc 606 for saas companies fei. That include software elements a consensus of the fasb emerging issues. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos some of the common significant themes associated with its application by entities in the software and software asaservice saas sectors, using insights and perspectives learned in the past year.
For example, the two software development companies examined in this paper, computer associates and microsoft, product sale as a percentage of revenue of 2000 is 94% and 88%, respectively. May 03, 2016 recognize revenue when or as the reporting organization satisfies a performance obligation. Fundamentals in software revenue recognition grant thornton lynne triplett, accounting principles partner. Companies across the globe are intensively rearchitecting their revenue recognition processes and policies as a result of the new asc 606 guidance. Commencing the data conversion services prior to golive shifts the dates of revenue recognition but should not alter the method of revenue recognition. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the impact of the new standard to revenue arrangements common to software companies. The complete guide to saas revenue recognition with asc 606. Its almost twice as long as the first edition, with more examples and discussion of the areas that companies have found most complex, as well as the latest iasb and fasb developments. Revenue recognition for saas andor term subscription businesses. Revenue recognition accounting for software as a service. Saas is viewed as the sale of a service that is provided over a period of time. Often revenues will be recognized upon transferring control of initial goods or services to a customer, with some portion of the arrangement fee deferred until the new feature is released.
Software companies are often tasked with deconstructing the typical. Applying the new accounting for revenue recognition. What does the new revenue recognition standard mean for tax. Under this method, the full fair value, as indicated by vsoe, of the undelivered products and services is deferred. Below is a list of potential revenue recognition implementation issues identified by the software entities revenue recognition task force. Classifying settlement proceeds and ip licenses by noah webster 2018jan19 in the second part of this twopart series on the asc 606, litigation columnist noah webster delves into the considerations for recognizing revenue from settlement contracts, the two distinctions of ip licenses, and more. Recognizing revenue can be particularly challenging in the software industry.