March 2017

The Bottom Line

• In 2014, the FASB and IASB issued their final standard on revenue from contracts with customers (ASU 2014-09 and IFRS 15, respectively). The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Despite issuing final guidance after nearly 12 years of development, there has been continued discussion and debate during the implementation effort, which has led the boards to amend some aspects of their “final” standard.
• Under the ASU, goods or services in a contract that are “highly dependent on, or highly interrelated with, other goods or services promised in the contract” or that “significantly modify or customize” each other are not considered distinct performance obligations.
• Revenue recognition in software arrangements will no longer be deferred if vendor-specific objective evidence (VSOE) of fair value is not established for undelivered goods or services, since revenue is allocated to all performance obligations on the basis of either an observable or an estimated stand-alone selling price.
• When contract consideration is variable, revenue should be recognized only to the extent that it is probable that a significant revenue reversal will not occur. In arrangements involving sales- or usage-based licenses of intellectual property, revenue is recognized only when it is determinable (i.e., when the sale or usage has occurred).
• As clarified in ASC 606-10-55-59 (as amended by ASU 2016-10), entities that license software to customers may need to determine whether the intellectual property being sold to customers is functional or symbolic.
• Since the new revenue standard requires significantly more extensive disclosures, technology entities may need to modify their systems and processes to gather information about contracts with customers that is not otherwise readily available.

Beyond the Bottom Line

This Technology Spotlight discusses the framework of the new revenue model and highlights key accounting issues and potential challenges for technology entities that account for revenue recognition under U.S. GAAP. For additional information about the new revenue standard, see Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard.

The full text of this Technology Spotlight is available below.

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