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Technology Alerts — Challenges Associated With Applying the New Revenue Standard

EITF Project on Revenue Recognition for Contract Modifications of Intellectual Property (July 2019)

Technology Alert
July 8, 2019
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Technology Highlights — Challenges Associated With Applying the New Revenue Standard: EITF Project on Revenue Recognition for Contract Modifications of Intellectual Property

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
See ASC 606-10-55-58C(b).
3
See ASC 606-10-25-10 through 25-13.
4
EITF Issue No. 19-B, “Revenue Recognition — Contract Modifications of Licenses of Intellectual Property.”
5
Many entities typically include postcontract customer support (PCS) when selling software licenses. However, for simplicity, the example excludes such PCS.
6
ASC 606-10-55-58C specifies that revenue from a license of IP cannot be recognized before both (1) the entity provides or makes available a copy of the IP to the customer and (2) the beginning of the period in which the customer is able to use and benefit from its right to use the IP. Because the software license has already been provided, it is relevant to analyze when the customer is able to use and benefit from the rights to the software license.
7
In accordance with ASC 606-10-25-12, a contract modification is a separate contract if additional distinct goods or services are added that are priced at their SSPs. In accordance with ASC 606-10-25-13, a contract modification is the termination of an existing contract and the creation of a new contract if additional distinct goods or services are added that are not priced at their SSPs. In Example 1 above, it is assumed that the extension of the license for the original seats and the license for additional seats are distinct from the license for the original seats transferred before the modification.
8
See Deloitte’s December 14, 2018, and February 28, 2019, Technology Alert publications for additional guidance on establishing SSPs for term licenses.
9
A SaaS arrangement would allow the customer to access the software on the vendor’s equipment but not obtain control of the underlying software in accordance with the requirements in ASC 985-20-15-5.
10
See ASC 606-10-25-10 through 25-13.
11
See ASC 606-10-55-41 through 55-45.
12
See ASC 606-10-55-22 through 55-29.
13
While right-of-return reserves are typically recognized as a refund liability, a noncancelable contract would result in a contract liability (e.g., deferred revenue) for an entity’s expected performance associated with a SaaS arrangement.