Determining the term of the contract is an important step in the revenue recognition process since the contract term could affect the identification of promises under the contract as well as the transaction price. ASC 606 provides guidance on determining the contract duration, including the effect of termination clauses and contract renewals. The contract term is determined on the basis of the period over which the parties to the contract have present enforceable rights and obligations. The contract term would not include optional renewal periods or the delivery of optional goods or services. However, the existence of purchase options in a contract with a customer could give rise to a material right. For further discussion of material rights, see Chapter 11.
Revenue associated with the license would be recognized at the beginning of each month, which is similar to ratable recognition given the short term (i.e., monthly).
See footnote 6.
Total noncancelable consideration of $5,100 for the initial month is allocated on a relative stand-alone selling price basis — that is, approximately 98 percent to the license and 2 percent to one month of PCS.