Firm A must assess whether it will probably collect the consideration owed under the contract before applying the five-step model. This article serves as a base reference point for your research into some of the focal issues. In sales to resellers, if the reseller is merely purchasing and reselling the software product, the transaction is accounted for as a regular tangible-product sale. Instead, the discount should be allocated to the other software element such that the upgrade right is reflected at full selling price of the upgrade software. This means that vendors have to consider various guidelines when developing their revenue recognition accounting policy to provide for SaaS arrangements. .
In addition, the Company is contemporaneously filing Amendment No. We recognize the professional services revenue using the cost-to-cost percentage of completion method of accounting. Other facts and circumstances may provide evidence of one business purpose or objective, and judgment should be used in making this determination. Specific criteria are provided for when a performance obligation is satisfied over time. A range of values may be a reasonable starting point if the selling price is expected to vary amongst similar customers and contracts.
Please update your disclosure to reflect that, as indicated on pages F-23 and F-24, you had no outstanding amounts under your credit facility as of March 31, 2010. Unlike many hosting arrangements, Saas arrangements allow the licensee to access the software code only during the contracted-use term. As of this writing, the effective date for the guidance would be January 1, 2017. Price concessions are a form of variable consideration that are often implied or assumed, as opposed to being explicit within the contract. Selling price may or may not be objectively determinable and this will have a significant impact on revenue recognition. In Q2, Firm A finished shipping the hardware and performing the professional services. Variable activity-based feesrepresents a monthly contingent fee measured generally upon one of three drivers: 1 the number of wireless subscribers using the software solution each month; 2 the aggregate dollar volume or number of transactions processed; or 3 specified rates for individual transactions processed.
The reporting depends on whether the entity functions as principal or agent. The type of discount, however, will significantly affect the allocation process. Revenue recognition is one of the major issues that often arise when attempting to deliver solutions to the marketplace term subscriptions. The new guidance also relaxes other requirements that could accelerate revenue recognition depending on the company and contract-specific factors. For more information, please see.
In arrangements that give the customer the right to take possession of the software, further explain how you allocate revenue to the elements of your arrangement for revenue recognition purposes. The new guidance also relaxes other requirements that could accelerate revenue recognition depending on the company and contract-specific factors. Under a SaaS arrangement, customer setup can be established quickly and billing done on a subscription basis for the entire contract duration. In essence, practitioners should evaluate the set of contracts as if one contract exists to determine if the goods or services promised within the set are a single performance obligation. Please see to learn more. The theory here is that it is difficult to know whether the customer is purchasing the current version or the upgraded version, so the guidance presumes that it is the latter.
Incremental Discounts Generally, an incremental discount on a future purchase, if significant, must be allocated to each of the arrangement elements. We recognize variable activity-based fees in the month in which they are known as the fees are contingent and not subject to reasonable estimation. However, companies that choose this option should provide transparent disclosure regarding the basis of presentation and lack of comparability. In addition, the Topic provides guidance for 1 arrangements under which a vendor will provide multiple deliverables to a customer, 2 reporting revenue gross or net of certain amounts paid to others, 3 accounting for consideration given by a vendor to a customer, and 4 the use of the milestone method in arrangements that include research or development deliverables. Accordingly, we account for the hosting fee element of the arrangement separately from the professional services and variable subscription. Alternatively, an entity can choose to recognize the cumulative effect of applying the new standard to existing contracts in the opening balance of retained earnings on the effective date, with proper disclosures.
Goods or services can transfer at a point in time or over time depending on the nature of the arrangement. In hosting, software as a service SaaS , and hybrid-cloud arrangements, a software license exists as a distinct performance obligation if the licensee can derive economic benefit independent of the other products or services within the contract. The term selling price can have many meanings, but in revenue recognition it is the price that the entity would transact a sale of the deliverable on a stand-alone basis. Hosting feerepresents a fixed monthly fee to host the software solution for a contractually specified term once the software solution is implemented. Some common instances within the industry that merit further analysis include: requiring the vendor to provide an access code, point-in-time transfer of control criteria, customer-specific acceptance provisions, timing of the transfer in a hosting arrangement, and contracting to provide software that is not yet available.
Customers access SaaS on a subscription basis, any additional implementation, consultation, or training services are offered in bundled arrangements, and this further complicates the revenue recognition concept. Two days later, Company A enters into another contract with Customer B to deliver four boom lift tires that Customer B will use on the customized boom lift in the future after the original tires deteriorate. Among other offerings, Company X provides 1 basic access to a unique portal that is customizable by the customer and 2 a range of implementation services. Thus, selling price is frequently not list price or rate card price. You indicate that professional services do not qualify as a separate unit of accounting. From time-to-time, customers may enter into separate arrangements subsequent to the initial implementation to enhance the functionality of the software. Software elements cause difficulty because they usually are sold in conjunction with other deliverables.