Revenue Recognition: Considerations for Technology & Software - - PDF document

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Revenue Recognition:

Considerations for Technology & Software Companies

To Receive CPE Credit

• Individuals
• Participate in entire webinar
• Answer polls when they are provided
• Groups
• Group leader is the person who registered & logged on to the webinar
• Answer polls when they are provided
• Complete group attendance form
• Group leader sign bottom of form
• Submit group attendance form to training@bkd.com within 24 hours of webinar
• If all eligibility requirements are met, each participant will be emailed their CPE

certificate within 15 business days of webinar

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INTRODUCTIONS

Mike Van Booven Director

mvanbooven@bkd.com

OUR GOALS FOR TODAY

The Five-Step Model Contract Costs Transition Methods Disclosure Requirements

1 2 3 4

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FIVE-STEP REVENUE MODEL

Step 1 Step 2 Step 3 Step 4 Step 5

Identify Contracts with Customers Identify Performance Obligations Determine Transaction Price Allocate Transaction Price Recognize Revenue

• Approval by all parties
• All parties are committed to perform their obligations
• Each party’s rights can be identified
• Payment terms are identified
• Commercial substance
• Transaction price likely to be substantially collected

Step 1 – Identify the Contract

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• Identify each promised good or service
• Determine if each obligation is distinct & distinct within the

context of the contract

• Disregard immaterial obligations
• Immaterial in the context of the contract
• Costs associated must be accrued when revenue recognized

Step 2 – Identify the Performance Obligations Step 2 – Identify the Performance Obligations

• Types of performance obligations
• Software as a Service (SaaS) – cloud computing or hosted software
• On-premises software – licenses of software that are run on the customer’s

premises

• Hardware & networking equipment
• Post-contract support (PCS)
• Professional services

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• Does contract contain promise of a license?
• Promise of license exists when
• Customer can take possession of the software at any time &
• Customer can run the software on its own (or easily contract with

another unrelated party)

• SaaS arrangements generally do NOT contain a promise of

a license

• Recognized over time per 606-10-25-27

Step 2 – Identify the Performance Obligations

• Are the promised goods/services (license, installation services,

support, updates) distinct?

• Capable of being distinct &
• Customer can benefit from the good/service either on its own or with readily

available resources

• Distinct within the context of the contract
• Consider the nature of the promise of the contract
• If distinct, then considered separate performance obligations

Step 2 – Identify the Performance Obligations

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• Post-contract support/maintenance considerations
• Are these promises distinct?
• What is the nature of the promise?
• Stand-ready to provide services to the customer
• TRG agrees straight-line is generally acceptable method to recognize (but

must support)

• Unspecified upgrades
• When-and-if-available
• Could be considered a stand-ready obligation provided over time (but must

evaluate)

Step 2 – Identify the Performance Obligations

• Material rights
• Future discounted pricing offered
• Considered a separate performance obligation if material
• Must consider if other customers would be offered similar pricing

independent of the contract

• If a separate performance obligation, allocate a portion of the transaction

price based on its relative standalone selling price

Step 2 – Identify the Performance Obligations

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• Collectibility
• Consideration must be substantially collectible
• Variable consideration
• Implied price concessions
• Options for additional goods & services
• Volume discounts – could be option or variable consideration

Step 3 – Determine the Transaction Price Step 3 – Determine the Transaction Price

• Significant financing component
• Does the contract include extended payment terms?
• e.g., subscription-based license paid over time
• Must evaluate to determine if actually a price concession
• Consider the purpose of the extended terms
• Excluded: Contracts with payment terms less than 1 year
• Subject to constraint

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• Standalone Selling Price
• Observable standalone selling prices (preference)
• PCS, e.g., renewal rates
• Services, e.g., standard hourly rates
• Bundles of goods/services frequently sold at

discounts

• Residual approach only appropriate if good/service

is sold at highly variable amounts (or price is not established)

• Licenses

Step 4 – Allocate the Transaction Price Step 4 – Allocate the Transaction Price

• Vendor-specific objective evidence
• No longer required
• Cloud-based term license example
• Three-year term license with coterminous related support
• License & support both deemed to be distinct
• Legacy
• License & support combined as cannot establish VSOE for support
• New guidance
• License & support are distinct promises
• License recognized upon transfer of control
• Support recognized over three-year term

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Step 4 – Allocate the Transaction Price

• Term licenses
• Allocating between performance obligations (license & PCS)
• Any reasonable method used but must use observable prices when

available

• May be able to demonstrate relationship with perpetual license

Step 5 – Recognize Revenue

• Recognition cannot occur until
• License is made available to the customer &
• The beginning of the period during which the customer is able to

use & benefit from the license

• The customer must have the contractual right to use the license

even if they are provided access to the license

• Functional IP – point in time
• Symbolic IP – over time

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• Nature of promise to customer
• Provide good (hardware) to customer – entity is a principal
• Arrange for good (hardware) to be provided to customer – entity is agent
• Is the good provided (hardware) controlled by the entity before it is

transferred to the customer?

• If yes – entity is a principal, recognize gross
• If not – entity is an agent, recognize net

Principal v. Agent: Hardware Sales

• Is the termination clause substantive?
• If not substantive, enforceable rights & obligations

may be affected

• e.g., contract length may be impacted
• Entity must use judgment & consideration of all

facts to determine if termination clause is substantive

Termination Clauses

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Contract Costs

• Costs to obtain a contract
• Must be incremental
• Not incurred without obtaining the contract
• If still incurred without contact, they are not incremental to the contract
• e.g., sales commissions
• Required to be capitalized
• If entity expects to recover the costs
• Does not require costs to be direct in order to be capitalized
• Need to evaluate all compensation plans
• Bonus payments
• Amortization
• Over the contract term
• Contract terms of one year or less can be expensed

Transition Methods

• Determine transition method
• Full retrospective – adjust each prior reporting period
• Change everything – all prior periods reported
• Practical expedients
• Contracts that begin & end in same period – no adjustment
• Completed contracts & variable consideration – use actual transaction price instead of

estimating

• Comparative periods before date of application – do not disclose transaction price

allocated to remaining performance obligations

• No retrospective restatement of contracts modified before beginning of earliest reporting

period

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Transition Methods

• Modified retrospective
• Only change current year
• Cumulative effect in beginning retained earnings of the period of adoption
• Additional disclosures
• Amount each current year (year of adoption) financial statement line item is affected,

had revenue been recognized under ASC 605

• Reasons for significant changes to each line item affected
• Can choose to apply to all contracts or only to contracts yet to be

completed as of the date of adoption

Disclosure Requirements

• New disclosures
• Disaggregation of revenue
• Point in time vs. over time
• Qualitative information
• Information about performance obligations
• Significant payment terms
• Nature of goods & services

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Effective Dates

Nonpublic Entities Annual reporting periods beginning after December 15, 2018 Calendar year January 1, 2019– December 31, 2019

• Start early!
• Remember, even if nothing changes, this has to be proved through

documentation

• Decide transition method
• Determine revenue streams
• Determine contracts in revenue streams & if they can be grouped together (portfolio

method)

• Analyze contracts to determine recognition under new standard
• Gather information for disclosures
• Documentation is key to effective & efficient adoption
• BKD has tools to help

Implementation Considerations

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Questions?

Continuing Professional Education (CPE) Credit

BKD, LLP is registered with the National Association of State Boards of

Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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• CPE credit may be awarded upon verification of participant attendance
• For questions, concerns or comments regarding CPE credit, please email the BKD

Learning & Development Department at training@bkd.com

CPE CREDIT

Thank You!

Mike Van Booven | mvanbooven@bkd.com