Question

Question: Analyse SS’s accounting policy governing revenue recognition of software Align in the current year.

SS enters into arrangements with customers that can include various combinations of software and services. Among its product portfolios, one arrangement makes significant revenue contribution in 2019 and 2018. Align is a project management software targeted at small and medium businesses. SS’s usual arrangement with customers not only includes the software license, but also includes customizing the software and integrating it into the customers’ information systems. In addition, customers purchasing the software license will receive software assurance service over a 5-year period at no additional cost. The assurance service guarantees proper functioning of the software within the customers’ information system. The company currently recognize the revenue from Align by amortizing it over the 5-year assurance period.

Answer 1

A company should confirm that it is probable that the economic benefits of the transaction will flow to it before revenue can be recognized.

The purpose of the collectibility assessment under is to determine whether there is a substantive contract between the company and its customer. Companies that conclude collection is not probable cannot recognize revenue for cash received if

(1) they have not collected substantially all of the consideration

(2) continue to transfer goods or services to the customer.

A license arrangement establishes a customer’s right related to a company’s intellectual property (IP) and the obligations of the company to provide those rights. Licenses of software company’s come in many forms and could for a term or perpetual.

When a license is not distinct from the other services, the company will need to determine whether the combined performance obligation are satisfied

(1) over time or

(2) at a point in time.

As per the the normal industry practices and interpretations, software license is not distinct from other related services because the installation services significantly customize the software. As such, the software license and the installation services are inputs into a combined output, and is a promise to deliver customized software

A performance obligation is satisfied and revenue is recognized when control of the promised good or service is transferred to the customer. Such transfer of control is determined when and if the customer has the ability to (1) direct the use of and (2) obtain substantially all of the remaining benefits from that good or service.

When a software licenses are is combined with other goods or services, the company has to assess whether control of the combined performance obligation transfers to the customer at a point in time or over time. If the combined performance obligation qualifies for over time recognition, the company will measure its progress toward completion.

Revenue recognition occurs at the time of delivery when the following conditions are satisfied:

· ● Risks and rewards of ownership have transferred

· ● Seller does not retain managerial involvement

· ● Revenue can be reliably measured

· ● Economic benefit will flow to the customer

· ● The costs incurred can be measured reliably

If these criteria are not met, revenue is recognized once the risks and rewards of ownership have transferred, which may be upon sale to an end consumer.

For revenue arising from the rendering of services, provided that all conditions are met, revenue should be recognized by reference to the stage of completion of the transaction at the balance sheet date

· The amount of revenue can be measured It is probable

· that the economic benefits will flow to the seller

· the stage of completion at balance sheet date can be measured reliably

The costs incurred, or to be incurred, in respect of the transaction can be measured reliably

When these conditions are not met, revenue arising from the rendering services should be recognized only to the extent of the expenses recognized that are recoverable