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Technology Alerts — Challenges Associated With Applying the New Revenue Standard

Accounting for Cloud-Based or Hosted Software Arrangements With Variable Consideration (December 2019)

Technology Alert
December 2, 2019
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Technology Highlights — Challenges Associated With Applying the New Revenue Standard — Accounting for Cloud-Based or Hosted Software Arrangements With Variable Consideration

Footnotes

1
For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
2
In this publication, it is assumed that a SaaS arrangement is accounted for as a service contract because the customer does not have the ability to take possession of the underlying software license on an on-premise basis.
3
In accordance with ASC 606-10-32-11, variable consideration can only be included in the transaction price “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.”
4
When a sales- or usage-based royalty is related only to a license of IP or a license of IP that is the predominant item in an arrangement, the royalty is recognized at the later of the date on which (1) the subsequent sale or usage occurs or (2) the performance obligation associated with the royalty is satisfied (or partially satisfied).
5
See ASC 606-10-25-31.
6
This assumes that the invoice practical expedient is not used. However, as discussed in Q&A 4, the invoice practical expedient could be used when a stand-ready SaaS arrangement (1) has a pricing structure that is solely variable on the basis of the customer’s SaaS usage, (2) is priced at a fixed rate per usage, and (3) gives the entity the right to invoice the customer for its usage as it occurs.
7
However, as discussed in Q&A 4, the invoice practical expedient could be used when a stand-ready SaaS arrangement (1) has a pricing structure that is solely variable on the basis of the customer’s SaaS usage, (2) is priced at a fixed rate per usage, and (3) gives the entity the right to invoice the customer for its usage as it occurs. While, in this example, the fees are not solely variable, if (1) the customer is expected to significantly exceed the minimum usage requirements, (2) the minimum usage is priced at the same rate as any overages, and (3) C has the right to invoice the customer for its usage as it occurs, C may be able to use the invoice practical expedient (which would result in the recognition of both the fixed and variable fees as usage occurs rather than ratable recognition).
8
$1.2 million fixed consideration plus $100,000 estimated variable consideration.
9
$1.2 million fixed consideration plus $120,000 estimated variable consideration.
10
$1.2 million fixed consideration plus $150,000 estimated variable consideration.
11
To determine whether the invoice practice expedient can be used, see footnote 7.
12
$100,000 plus ($10,000 × 11 months).
13
$100,000 + $110,000 + $120,000 + $130,000 + $140,000 + $150,000 + $160,000 + $170,000 + $180,000 + $190,000 + $200,000 + $210,000.
14
$200,000 total fees (200,000 transactions × $1 per transaction) less $100,000 minimum in month 1.
15
$200,000 total fees (200,000 transactions × $1 per transaction) less $110,000 minimum in month 2.
16
$155,000 fixed consideration plus $100,000 overage fees (see footnote 14).
17
$155,000 fixed consideration plus $90,000 overage fees (see footnote 15).
18
We believe that for these types of arrangements, the allocation objective would only be met in limited circumstances. For example, if the number of overages was expected to be the same in each month (in line with the increase in minimums), an entity may be able to apply the variable consideration allocation exception. However, the entity must have sufficient historical data to substantiate that the number of overages will be the same in each month. In addition, to determine whether the invoice practice expedient can be used, see footnote 7.
19
To determine whether the invoice practice expedient can be used, see footnote 7.