Software Revenue Recognition 2014 a Roadmap to Applying ASC 985-605

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Transcript of Software Revenue Recognition 2014 a Roadmap to Applying ASC 985-605

  • Software Revenue RecognitionA Roadmap to Applying ASC 985-605

    Third EditionDecember 2011

  • Subtopic 985-605, SoftwareRevenue Recognition, from the FASB Accounting Standards Codification, is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission.

    SOP 97-2: Copyright 19972009 by American Institute of Certified Public Accountants, Inc. Used with permission.

    This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

    Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

    As used in this document, Deloitte means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

    Copyright 2011 Deloitte Development LLC. All rights reserved.

  • iContentsPreface 1

    Acknowledgments 2

    Overview 3

    Background 3Summary of the Potential Impact of the Revenue Project 4

    Identify the Contract With a Customer 4Identify the Separate Performance Obligations in the Contract 4Determine the Transaction Price 5Allocate the Transaction Price to Separate Performance Obligations in the Contract 5Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation 5

    Overview of ASC 985-605 5Scope 5Basic Revenue Recognition Principles 8Multiple-Element Arrangements 12Additional Software Products, Upgrade Rights, and Discounts 15Postcontract Customer Support 19Services 23Funded Software-Development Arrangements 25Contract Accounting 25

    Section 1 Background and Scope 27

    Background 271-01 Background of ASC 985-605 271-02 AICPA Technical Practice Aids Background and Level of Authority 271-03 Comparison of ASC 985-605 and SAB Topic 13 (Part I) 281-04 Comparison of ASC 985-605 and SAB Topic 13 (Part II) 28

    Scope 291-05 Entities That Have Arrangements Within the Scope of ASC 985-605 301-06 Additional Considerations in the Determination of Whether Software Is More Than Incidental 311-07 License Versus Sale of Software 321-08 Software Upgrade for Hardware 321-09 Leases Involving Hardware and Software 331-10 Nonmonetary Transactions 341-11 Reassessment of Revenue Recognition Accounting Policies 35

  • ii

    Contents Software Revenue Recognition: A Roadmap to Applying ASC 985-605

    Scope Hosting Arrangements 351-12 Up-Front Services in Hosting Arrangements 351-13 Example of a Hosting Arrangement 361-14 Determination of Whether Significant Costs Are Incurred in a Hosting Arrangement 361-15 Calculation of a Significant Penalty 371-16 Hosting Penalties When a Customer Takes Possession of the Software Without Incurring Significant Cost 37

    Scope Discounts 381-17 Significant Incremental Discounts 381-18 Example of a Discount Offered on the Future Purchase of Additional Copies of a Software Product in an Arrangement 381-19 Discounts on Future Upgrades and Enhancements 381-20 Early Renewal of Term Arrangement Without VSOE of Fair Value of PCS 39

    Section 2 Recognition 40

    Basic Principles 402-01 Definition of a Software Element 422-02 Accounting for Free Software 422-03 Indemnifications: Inherent Component of Software License 432-04 VSOE of Fair Value for Elements Not Sold Separately 442-05 Elements Sold Separately Infrequently 442-06 Other Considerations in Determining VSOE of Fair Value 442-07 List Price Used as VSOE of Fair Value 462-08 Penalties Used as VSOE of Fair Value 462-09 Multiple Elements Accounted for as a Single Element 462-10 VSOE of Fair Value for Nonsoftware Elements 472-11 Residual Value as Evidence of VSOE of Fair Value 472-12 Allocation of Discounts in Multiple-Element Arrangements 472-13 Whether Discounts in Multiple-Element Arrangements Should Be Allocated to All Elements 472-14 Accounting for an Arrangement in Which the Undelivered Elements Are PCS and Services and VSOE of

    Fair Value Exists for Neither Element 482-15 Accounting for an Arrangement in Which the Undelivered Elements Are PCS and Services and VSOE of

    Fair Value Only Exists for PCS 492-16 Accounting for an Arrangement in Which the Undelivered Elements Are PCS and Services and VSOE of

    Fair Value Only Exists for the Services 502-17 Bifurcation of PCS Between Software Deliverables and Non-Software Deliverables 512-18 Accounting for Arrangements in Which Undelivered Elements Are Essential to the Functionality of the

    Delivered Elements 522-19 Application of the Concept Essential to the Functionality 522-20 Additional Literature on the Concept of Essential to the Functionality 522-21 Involvement of Third-Party Vendors 532-22 Software Used With Multiple Units of an Electronic Device 532-23 Revenue Recognition for Hardware Deliverables in Software Arrangements 542-24 Forfeiture or Refund Clauses 542-25 Indemnifications: Effect on Revenue Recognition 55

    Evidence of an Arrangement 55

    2-26 Whether a Customers Letter of Intent Represents Persuasive Evidence of an Arrangement 562-27 How Master Agreements Affect Evidence of an Arrangement 56

  • iii

    Contents Software Revenue Recognition: A Roadmap to Applying ASC 985-605

    2-28 Definition of an Arrangement 562-29 Side Agreements 57

    Delivery Has Occurred 572-30 Delivery in a Hosting Arrangement Within the Scope of ASC 985-605 582-31 Nonrefundable Licensing Fee Example 582-32 License Extension Fee Example 592-33 Synthetic FOB Destination Shipping Terms 592-34 Electronic Delivery via Download 59

    Delivery Has Occurred Customer Acceptance 602-35 Customer Acceptance Provisions Deemed Acceptance 602-36 Customer Acceptance Provisions That Are Tied to the Payment Terms 602-37 Customer Acceptance Example 60

    Delivery Has Occurred Multiple Copies of Software Products Versus Multiple Licenses 612-38 Volume Discount 612-39 Fixed Fee Licensing Example (Part I) 612-40 Fixed Fee Licensing Example (Part II) 62

    Delivery Has Occurred Delivery Other Than to the Customer 622-41 Discussion of the Phrase Another Site Specified by the Customer 622-42 Bill-and-Hold Arrangements 63

    Delivery Has Occurred Delivery Agents and Authorization Codes 63Fixed or Determinable Fees and Collectibility 63

    2-43 Factors to Consider When Assessing Collectibility 642-44 Modification of a Software License 642-45 Subsequent Changes in Circumstances That Result in a Different Conclusion Regarding Whether a Fee Was

    Fixed or Determinable at the Inception of the Arrangement 652-46 Most-Favored-Customer Clauses 65

    Fixed or Determinable Fees and Collectibility Extended Payment Terms 652-47 Provisions of Extended Payment Terms 662-48 Circumstances Under Which Extended Payment Terms Cause a Fee Not to Be Fixed or Determinable 662-49 Determination of What Constitutes a Significant Portion of a License Fee 662-50 Extended Payment Term Arrangement Discussions With SEC Staff 662-51 Payment Terms Less Than 12 Months 672-52 Payment Terms Greater Than 12 Months 682-53 Interest on Receivables 682-54 Impact of Letters of Credit on the Evaluation of Extended Payment Terms 692-55 Evaluating the Effect of Granting Concessions in Arrangements With Extended Payment Terms 692-56 Sale of Future Revenues 702-57 Recognition as Payments From Customers Become Due 702-58 Extended Payment Terms in a Perpetual License With PCS 71

    Fixed or Determinable Fees and Collectibility Reseller Arrangements 712-59 Price-Protection Clauses in Reseller Arrangements 722-60 Price-Protection Clauses in End-User Arrangements 732-61 Recognition of Fees in Arrangements Involving Newly Established or Undercapitalized Resellers 74

    Fixed or Determinable Fees and Collectibility Customer Cancellation Privileges 742-62 Customer Cancellation Privileges 74

  • iv

    Contents Software Revenue Recognition: A Roadmap to Applying ASC 985-605

    Fixed or Determinable Fees and Collectibility Fiscal Funding Clauses 742-63 Fiscal Funding Clause With Customers Other Than Government Organizations 75

    Multiple Element Arrangements 752-64 Multiple-Element Arrangements: Overview of Effect of VSOE of Fair Value Recognition and Measurement Requirements 76

    Multiple Element Arrangements Upgrades or Enhancements 772-65 Specified Upgrades Implied in an Arrangement 772-66 Specified Versus Unspecified Products or Upgrades 782-67 Product Roadmaps 792-68 Example of Determining Whether a PCS Contract Includes a Specified Upgrade 792-69 Upgrades to Software for Compliance With Internet Protocol Version 6 802-70 Prohibition of Allocation of Discounts to Specified Upgrade Rights 802-71 Change in the Estimate of the Number of Customers That Are Not Expected to Exercise Their Upgrade Rights 802-72 Specified Upgrade Right Provided in a PCS Arrangement When the Upgrade Is Not Sold Separately 81

    Multiple Element Arrangements Additional Software Products 812-73 Specified Upgrade Right Versus Additional Software Product 822-74 Examples of PCS and Variable-Fee Arrangements With