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Understanding the New Revenue Recognition Standard

In the first part of this blog series, I looked at the big picture changes of the new revenue recognition standard and provided pointers to some good general resources. Now, let’s take a look at an example on how the removal of industry specific guidance will impact software companies.

In their publication, PWC provides the example of sale of a perpetual software license with post-contract support (PCS). For this example, none of the goods and services are sold on a standalone basis, and there is no stated renewal fee for the PCS services.

Under the old model, a company would try to establish the vendor specific objective evidence (VSOE) of fair value for each element of the contract to avoid deferring the license revenue over the contract length of the PCS. However, in this example, establishing VSOE of fair value might be very difficult as no standalone prices exist and the company could face the dreaded full deferral of the license revenue.

So under the old model, the stringent VSOE requirement creates the risk of full deferral for software companies. Does that mean under the new rules, without VSOE, we can avoid the risk of full deferral? As always, the answer is… it depends.

PWC states that under the new rules the software company should account for the license and PCS as separate performance obligations in accordance with the principle based approach. The transaction price for each obligation then needs to be estimated and allocated to the license and PCS of the contract. In this example, the new standard will accelerate the recognition of revenue if VSOE of fair value was not previously established.

So that’s good news for software companies, right? Well, it depends…in the above example, full deferral is avoided because the PCS and license were identified as separate performance obligations. However, in certain situations separation might not be appropriate, especially when products and services are ‘highly dependent’ on each other. It will be interesting to see more industry specific use cases published in the coming months to understand how the industry will interpret the various business use cases.

For more technology related accounting examples, especially around the determination and allocation of transaction prices, please refer to the full PWC report.

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While many aspects of traditional accounting remain the same, where this process is managed has changed drastically.  Cloud accounting is becoming an even stronger force in the market of finance technology, and is quickly rising up the ranks of favorite choice for CFOs, COOs, CEOs and CIOs that want to streamline their business.

Why are so many accounting professionals choosing to move to cloud-based accounting?  Here are the top five reasons.

  1. Rapid growth.  Business is booming, and corporate officers need the ability to keep up with real-time financial information about their company.  Cloud accounting is integrated and provides real time results for better decisions.
  2. Low maintenance.  With on-premise installed, non-integrated finance systems, companies are throwing resources, spreadsheets,and valuable time into the the mix to keep up the need for information. The ease of not having to buy, store, and maintain software is a breath of fresh air that helps the accounting department work more efficiently.
  3. There is only one version that is continuously updated.   You no longer have to worry if your outdated system has security vulnerabilities or will break when you apply upgrades.
  4. For most businesses, payroll is one of the largest expenses. With cloud accounting, payroll is seamlessly integrated into your finance system, providing you real time insights.
  5. Access anywhere.  The top reason so many are turning to cloud based accounting is that it can be accessed anywhere with internet access. on any device….PC, MAC, Tablet, Smartphone.

To learn more about what cloud accounting can do to help your business run more efficiently, please contact us.