Enterprise License Agreement Accounting

A new accounting standard, IFRS (International Financial Reporting Standard) 16, will come into effect on January 1, 2019, with a significant impact on the company`s leasing accounting. Each of these basic criteria for income recognition is discussed in detail in Part 1 of this article.B. Dangerous areas in the new SOPThe following areas summarize some of the “dangerous areas” of the new SOP that may lead a software company to delay revenue recognition in its software agreements: software licensing and licensed software changes under separate agreements will not resolve the software on its own. problems of delay in detecting sales. Issues relating to the recognition of turnover are considered on an agreement basis and not on a single contractual basis. For example, a software company may enter into an agreement with a user, in which a software application is granted to the user as part of a licensing agreement, changes to the licensed software may be made as part of a separate service agreement and the PCS is provided as part of a separate software maintenance contract. If all of these agreements are concluded at about the same time, all agreements will be reviewed together to determine the impact on revenue recognition. Therefore, when the lawyer is working with a client on a revenue recognition issue in a given contract, the lawyer should consider whether there will be any modifications, other services or software licensed for the user in addition to the software and licensed services described in the agreement in question. Beware of the bundled offer. Software companies often concede a software application and modify the software to meet the user`s specific needs. Software companies often bundle software and software modifications under license and offer the user a “turnkey” solution for a price. According to the new sop, this practice may result in a deferral of revenue recognition for the royalty.2 As explained below, the combination of software and services may prevent a software company from providing objective evidence specific to fair value for each element of a software contract.

Beware of one-time agreement. The lawyer should carefully consider an agreement for licensed software or services that his client has not previously offered to his clients. As explained in the first part of this article, the new SOP implements a new concept called “vendor-specific object evidence of fair value,” which can result in a delay in revenue recognition for many software companies. This approach prevents companies from arbitrarily transferring their revenues to items previously delivered (see the section below entitled “Beware of Revenue Change”). As has already been said, after an agreement is allocated among its various elements, the revenues are allocated to each element. The fees indicated in the agreement for each item are not necessarily the amounts allocated for revenue recognition.