Question

Question: Is 5-year assurance service a distinct performance obligation in this contract? and How to currently recognise the revenue from Align by amortizing it over the 5-year assurance period.

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

Answer 1:

As the question case-let suggests, 'In addition, customers purchasing the software license will receive software assurance service over a 5-year period at no additional cost.' the word 'in addition' makes the substantial difference in opinion. Thus, it becomes performance obigation in this contract.
As given in Sales Offer, the customer who seeks this software also receives 5 year assurance service. It is included in the agreement between SS and Customer. Thus, 'assurance service' becomes a performance obligation under Contract Act.

Answer 2:

Recognising Revenue is complex but not difficult task.

(A) First add revenue from all the combination or customisations and services (include Hard and Soft).

(B) Amortise differently for all the points above.

Net Revenue = (A) - (B).

Example:

Pre-installation Inspection Charges	XX
CD - Hardware (Any other hardware to be added	XX
Customisation Charges (For 5 years)	XX
Service Charge (For 5 years)	XX
Technical Assistance and data conversion charges	XX	XXXX
Less: Amortisation to Software for Current Period*	(XX)	(XX)
Total		XXXX
Taxes		XX
Grand Total		XX

Note: * Amortisation is to be done for only one year. (Current).

Your answer ends here.

Advanced Level:

Software License and Service Contract must be charged separately to the customers. If possible, add this clear clause to the terms of contract/ agreement. This is necessary when high customisations are given to high profile customer. Service also is needed frequently to their rescue. Keep software Periodical Subscription based. This will increase revenue to the organisation.

Hope this answer helps.

All the best!