software and cloud services -- the new revenue standard
TRANSCRIPT
Revenue recognitionWhat new requirements mean for the software and cloud services industry
What we'll discuss
1. The changes ahead2. The 5-Step model for the new revenue recognition standard3. Timing of revenue4. What it means for software and cloud services5. Learn more
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The Changes Ahead
INTRODUCTION
There is now a global accounting standard for revenue recognition.
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The Changes Ahead (cont.)
INTRODUCTION
• ASU 2014-09 has many software and cloud services companies wondering how they will be affected
o ASC 605-25, Revenue Recognition: Multiple-Element Arrangements, and most of ASC 985-605, Software: Revenue Recognition, are superseded and replaced by ASC 606. ASC 606 applies to all software and cloud services arrangements; entities are no longer required to determine which guidance applies to cloud services arrangements.
o Effective for public entities in annual periods beginning after Dec. 15, 2016, and for private entities beginning after Dec. 15, 2017
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The 5-Step Model for the New Revenue Recognition Standard (ASC 606)
1. Identify the contract with the customer2. Identify the performance obligations in the contract3. Determine the transaction price4. Allocate the transaction price to the performance obligations5. Recognize revenue when the entity satisfies each performance
obligation
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Get the full storyResources on grantthornton.com
• Software and cloud services -- the new revenue standard• A shift in the top of the line: A new global standard on accounting for
revenue• Impact of new revenue recognition guidance on software and SaaS
companies webcast
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Timing of revenue
• Variable pricing• Credit risk• Time value• Contract costs
Revenue is recognized as the work is performed if control over the promised goods or services is transferred to the customer over time.
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Timing of revenue: Specific Issues
• Noncash consideration• Rights of return and other customer options• Supplier repurchase options• Warranties• Principal versus agent (gross versus net)• Licensing intellectual property• Breakage• Nonrefundable upfront fees• Consignment and bill-and-hold arrangements
ASC 606 also provides specific guidance on various other transaction types, including:
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Timing of revenue: Disclosures
• Customer contracts, such as the remaining performance obligations (backlog)
• Key judgments made• Contract costs recognized as assets• The customer simultaneously receives and consumes the
benefits• The customer controls the asset as it is created or enhanced• The asset has no alternative use, and the supplier is entitled to
payment for performance-to-date and expects to fulfill the contract
ASC 606 will require considerably more disclosure about revenue, including information regarding:
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Timing of revenue: Multiple-element arrangements
• The customer benefits from the item on its own or along with other readily available resources
• The supplier does not provide a significant service of integrating the various performance obligations
A customer contract may cover a bundle of goods or services. ASC 606 requires performance obligations to be accounted for separately if distinct. For example:
If performance obligations are distinct, the contract price is allocated between them based on the estimated standalone selling price of each performance obligation.
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Timing of revenue: Transition and effective dateThe ASC 606 is effective for public entities in annual periods beginning after Dec. 15, 2016, including interim periods therein, and for private entities in annual periods beginning after Dec. 15, 2017.
Earlier application is prohibited for public entities. Private entities may adopt the guidance early in years beginning after Dec. 15, 2016.
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What it means for the software and cloud services industries
• Identifying the contract• Identifying performance obligations• Evaluating contract • Determining the transaction price• Allocating transaction price to performance obligations• Recognizing revenue—satisfaction of performance
obligations• Contract costs• Disclosures
Software and cloud services companies should be aware of the effects of the new global standard (ASC 606) on:
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Contact us
Christine JanisProfessionals Standards Partner, AuditT 415.365.5438E [email protected]
GRANT THORNTON REVENUE RECOGNITION RESOURCES
Matt McClearyAudit, Senior ManagerT 919.881.2778E [email protected]
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