For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
In June 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-05, Revenue From Contracts With Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities. The ASU permits nonpublic entities that have not yet issued their financial statements or made financial statements available for issuance as of June 3, 2020, to adopt ASC 606 for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. Since the deferral is not mandatory, nonpublic entities may still elect to adopt ASC 606 in accordance with previous guidance (i.e., for annual reporting periods beginning after December 15, 2018, and for interim reporting periods within annual reporting periods beginning after December 15, 2019).
EITF Issue No. 19-B, “Revenue Recognition — Contract Modifications of Licenses of Intellectual Property.”
The other issue is the accounting for a contract modification in which the contract term for existing licensing rights is extended (i.e., renewed) and additional rights are purchased as part of that modification.
In this publication, it is assumed that the SaaS arrangement is accounted for as a service contract because the customer does not have the ability to take possession of the underlying software on an on-premise basis in accordance with the requirements of ASC 985-20-15-5.
See ASC 606-10-25-10 through 25-13.
See ASC 606-10-55-41 through 55-45.
See ASC 606-10-55-22 through 55-29.
This alternative view is consistent with the accounting for on-premise term-based software licenses that enable the customer to terminate the license agreement without penalty. For example, if a customer paid for a one-year on-premise term-based software license but had the ability to cancel the arrangement for a pro rata refund with 30 days’ notice, the term of the initial arrangement would be 30 days, with optional renewals thereafter. In those circumstances, the right of return guidance would not be applied.
While the material right’s SSP could be adjusted for any discount the customer could receive without exercising the option, this example assumes that the customer could not receive a discount without exercising the option.
The allocation of the transaction price based on relative SSP is included for illustrative purposes only and uses simplistic assumptions; judgment will be required to determine SSPs in this and similar fact patterns.
The variable consideration resulting from the right of return would generally be estimated on the basis of the transaction price allocated to the on-premise software and related PCS and the amount of that allocated transaction price that is expected to be refunded as a credit to the SaaS arrangement (i.e., the pro rata portion of the on-premise software and related PCS that is “unused”). If the credit plus any incremental fee required to convert to the SaaS arrangement is less than the SSP of the SaaS, the entity may need to consider whether a material right has also been granted.
Under ASC 606-10-32-11, an entity includes variable consideration in the transaction price “only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.”
A liability for a return right is typically recognized as a refund liability in accordance with ASC 606-10-55-23(b). However, we believe that if an entity’s contract with a customer is noncancelable and consideration therefore would not be refunded to the customer, it would be acceptable to recognize the liability as a contract liability (e.g., deferred revenue) for the entity’s expected performance associated with a SaaS arrangement.
The amount of variable consideration to include in the transaction price is provided for illustrative purposes only and uses simplistic assumptions; judgment will be required to estimate variable consideration and the related constraint in this and similar fact patterns.
Note that if an entity’s contract does not contain a cloud conversion right at contract inception, a practice of allowing customers to convert their on-premise software license to a SaaS arrangement may create an implied right that is similar to the explicit right provided to the customer in Example 1. Significant judgment will be required to determine when an implied right is created in these circumstances.
Entity B would generally allocate the $125,000 between PCS and the SaaS on the basis of their relative SSPs if required to do so for presentation or disclosure purposes. However, because both PCS and the SaaS are stand-ready obligations that are recognized ratably over the same period, the $125,000 was not allocated between the two services for purposes of this illustration.
Entity B would generally allocate the $325,000 between PCS and the SaaS on the basis of their relative SSPs if required to do so for presentation or disclosure purposes. However, because both PCS and the SaaS are stand-ready obligations that are recognized ratably over the same period, the $325,000 was not allocated between the two services for purposes of this illustration.