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Understanding the Revenue Recognition Rule for Tech Companies

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The Accounting Standard Updated or ASU is set to alter the way you deal with and think about financial reporting. This new standard doesn’t just change financial statement disclosures, but also the way your company accounts for revenue and any related transactions. While all industries are affected by this new standard, companies in the technology field may require the most in-depth analysis of these changes. This is mainly due to the work being characterized as intellectual property and it means your licenses and contracts are more complex and they are multi-layered.

For most stakeholders across the business community, revenue is the most significant item in any financial statement. Actual information and disclosures regarding revenue are somewhat scarce, especially when compared to other items that have robust disclosure requirements, such as stock-based compensation.

The connection present between revenue recognition and the information offered by financial reporting is not always clear, which was the impetus for the changes to this standard. Along with the additional disclosure, the timing related to revenue recognition, along with how incremental costs are related to getting the contract, may change significantly for some companies that are in the technology community. This is especially true for software developers.

This newly introduced principle-based approach is considered more conceptual than the current GAAP – generally accepted accounting principles. It requires significant judgment to apply properly. You will probably speed up with the basics and even some of the details related to tech companies especially, but you must have a good understanding of the financial reporting rules to be prepared and fully comply.

Understanding “Right to Use” vs. “Right to Access”

This all-new accounting standard stated that companies need to account for the promise to provide the customer with the “right to access” the intellectual property as a performance obligation that is satisfied over time. This is because the customer will both receive and consume the benefit from the company’s performance of giving access to the intellectual property as the performance occurs.

On the other hand, the company’s promise to provide customers with the “right to use” the intellectual property will be satisfied at a specific point in time and as a result, the revenue will be recognized at the specific point in time that the license is transferred. The basic concept in this specific standard is control – such as when will the customer receive control of the license? When they are given the right to access the intellectual property from the customer, control is transferred over time, and the revenue will be recognized accordingly.

When determining the revenue recognition for licenses, the main difference between the right to use and the right to access has to be understood in relation to the standard. The right to access intellectual property over a certain amount of time is inherent to the symbolic intellectual property, which means intellectual property without any standalone functionality – like an animated character or a sports team’s logo.

This right to access is also applicable to functional intellectual property, like the SaaS-based license agreement where the customer can access the software during a certain period of time. With these situations, the contract provides a specified term of access, and with hosted software, the access can be revoked. What this means is that revenue must be recognized for the duration of the set contract period, as the online service and license that gives access to the software are not distinct.

The Complexities of the New Standard

As anyone can see, the complexities related to this new standard may make it difficult for some tech businesses to “get it right.” If this is the case, working with a professional service provider who can ensure that the standard is being met and that all the rules and regulations in place are followed. By fully understanding how this applies to a company, you can avoid mistakes, which may carry additional fines or other issues that negatively impact the company in question.

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