Question

What does article mean?

Revenue Recognition

Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.

Judgment is also required to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products. Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive unspecified future versions of software products and are accounted for as subscriptions, with billings recorded as unearned revenue and recognized as revenue ratably over the coverage period.

Software updates are evaluated on a case-by-case basis to determine whether they meet the definition of an upgrade, which may require revenue to be deferred and recognized when the upgrade is delivered. If it is determined that implied post-contract customer support (“PCS”) is being provided, revenue from the arrangement is deferred and recognized over the implied PCS term. If updates are determined to not meet the definition of an upgrade, revenue is generally recognized as products are shipped or made available.

Microsoft enters into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements, we follow the industry-specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.

Customers purchasing a Windows 10 license will receive unspecified updates and upgrades over the life of their Windows 10 device at no additional cost. As these updates and upgrades will not be sold on a stand-alone basis, we are unable to establish VSOE. Accordingly, revenue from licenses of Windows 10 is recognized ratably over the estimated life of the related device, which ranges between two to four years.

The new standard related to revenue recognition will have a material impact on our consolidated financial statements. See Note 1 – Accounting Policies in the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion

Answer 1

Revenue recognition is an accounting principle that outlines the specific conditions under which revenue is recognized. In theory, there is a wide range of potential points for which revenue can be recognized.

Therefore, IFRS outlines the criteria for revenue recognition with customers.

According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied:

1. Risks and rewards have been transferred from the seller to the buyer.

2. The seller does not have control over the goods sold.

3. The collection of payment from goods or services is reasonably assured.

4. The amount of revenue can be reasonably measured.

5. Costs of revenue can be reasonably measured.

The Financial Accounting Standards Board (FASB) which sets the standards for U.S. GAAP has the following 5 principles for recognizing revenue:

1. Identify the customer contract

2. Identify the obligations in the customer contract

3. Determine the transaction price

4. Allocate the transaction price according to the performance obligations in the contract

5. Recognize revenue when the performance obligations are met.

Revenue recognized for each element is based on vendor-specific objective evidence (VSOE) of fair value, regardless of separately stated prices in the contract

VSOE is limited to:

The price charged when the element is sold separately, or

If not yet being sold separately, the price established by management having the requisite authority for which it is probable that the price will not change

List price typically is not an indication of fair value

Use of best estimate of selling price (BESP)

Price a seller would transact if the item were sold regularly on a standalone basis

Must use VSOE or TPE if available before looking to BESP

Vendor Specific Objective Evidence (VSOE) of selling price is limited to either of the following:

a. Price charged when the deliverable is sold separately; or

b. For a deliverable not yet being sold separately, the price established by management having the relevant authority (it must be probable that the price, once established, will not change before the separate introduction of the deliverable into the marketplace)

Third Party Evidence (TPE) of selling price is the price of the vendor’s or any competitors largely interchangeable products or services in standalone sales to similarly situated customers

Recognise PSC ratably over PSC term, services as delivered and residual value for software ratably over subscription term.