Assume that TSA Inc. entered into a contract with Client Anon for $230,000 on January 1, Year 1, to transfer a software license and an additional $15,000 for the installation of the 16 software. The license entitles Anon to use the software in its current form over an unlimited period and does not include updates. Two years of customer support come free with the license. In recent stand-alone contracts with other customers for the same software, TSA has charged $200,000 for the software license, $40,000 for 2-year customer support, and $20,000 for installation. The software is usable without customer support from TSA and it can be installed by other vendors. The installation is expected to take 250 hours of which 150 hours will be required in Year 1 and the remainder in Year 2. The entire fee of $245,000 is collected on the contract date. Base your answers on the conceptual framework in ASC 606. a. Determine the number of performance obligations, and the contract price to be allocated to each, in the following situations: i. The installation service does not modify the software. ii. Installation involves customizing the software to work seamlessly with other software used by the customer. As before, the installation can be performed by other firms as well. b. Explain why your responses in I and ii above differ referring to ASC 606-10-55 (paras 146 and 147) and 606-10-25 (paras 14, 19, 20 and 21). c. How much revenue will be booked in Years 1 and 2 from the contract in each case? Assume that all conditions for revenue recognition other than those specified have been met in the situations above.
Before start explaining the above question, Let me explain about New method of Revenue recognition. While studying CPA, We used to follow below formula for easy recognition : ISTAR
1) I - identify the contract with Custmer
2) s- Identify Seperate Performance Obligation
3) T- Determine the Transaction price
4) A- Allocation of Transaction price among Performance Obligation based on Standalone Selling price( Fair Value basis)
5) R- Recognition of revenue
New Recognition of revenue and Impact on Software Industry. major impact on recognition of License revenue. Wether License revenue we will recognised at the point or Over the priod time.
License revenue divided into Two part - Right to use and Right to acces. This scenario normally appear when License are distinct in nature.
Normally as per New Standard everything based on Contractual Obligation. Right to a Access based License would be over the period of time. Other side, Right to use base license software the time.
ASC 606, also talk in line with IFRS 15 with different terms. 1) Functional 2) Symbolic . By name, we can understand that Symbolic mean brand, logo which all are not relates to Functional, so we can recognised revenue over the period basis and other case mean functional, we can recognised at the point basis.
Another important point to note that specially in case of Software company we can recognised revenue under different head
1) Fixed Bid basis - This is basically POCM (% of completion method)
2) Fixed price, T&M basis - Flat base rate and recognised over the period of time
3) annual Support/Maintenance service - recognised revenue over the period of time.
4) license fees revenue as discussed above
So breakdown of $ 245000 between $ 15000 installation and Software $ 2,30,000. installation of the system we can recognised revenue on % of completion basis(POCM) and License revenue $ 2,30,000 we can recognised as mentioned above base.
Installation revenue recognised as below :
Expected hr | 250 |
Yr1 | 150 |
% coverage | 0.6 |
Installation | 20,000 |
Yr1 Revenue Recognised | 12,000 |
Yr2 | 100 |
% coverage | 40% |
Installation | 20,000 |
Yr2 Revenue Recognised | 8,000 |
Journal entries :
Flow of JE while recognising revenue on POCM basis :
Year 1 - Unbilled Contract receivable A/C Debit - $ 12000
Contract Revenue Earned A/C - credit - $ 12,000
Year 2 - Unbilled Contract receivable A/C Debit - $ 8000
Contract Revenue Earned A/C - credit - $ 8,000
General Knowledge - While raising Invoice : Account Receivable A/C - Debit
Unbilled Contract Receivable -A/C credit
While collection of cash --- Cash A/c - Debit
Account Receivable A/C - credit
Assume that TSA Inc. entered into a contract with Client Anon for $230,000 on January 1,...
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