Revenue for software and SaaS - KPMG

Revenue for software and SaaS

Handbook

US GAAP December 2019 _____ us/frv

Contents

Foreword...................................................................................................... 1 About this publication .................................................................................. 2 Software and SaaS industry overview ......................................................... 5 A. Scope..................................................................................................... 19 B. Step 1: Identify the contract with the customer ................................... 64 C. Step 2: Identify the performance obligations in the contract................ 128 D. Step 3: Determine the transaction price ............................................... 263 E. Step 4: Allocate the transaction price to the performance obligations

in the contract ....................................................................................... 348 F. Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation.......................................................................... 443 G. Contract modifications .......................................................................... 558 H. Contract costs ....................................................................................... 618 Appendices .................................................................................................. 673

Applicable to all industries..................................................................... 673 Index of Q&As ....................................................................................... 685 Index of examples ................................................................................. 707 KPMG Financial Reporting View .................................................................. 717 Acknowledgments ....................................................................................... 718

? 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Revenue for software and SaaS

1

Foreword

A world without software-

specific revenue guidance

and without VSOE

The new revenue standard was issued in 2014, and the 2018 and 2019 application date once seemed like a long way off. Now, as 2019 nears an end, public companies have adopted the new revenue recognition standard (Topic 606) and the adoption for private companies is here, right now.

Topic 606 represents the dawn of an accounting world where software arrangements are not subject to industry-specific GAAP and where the concept of vendor-specific objective evidence of fair value (VSOE) no longer exists.

Topic 606 requires software and software-as-a-service (SaaS) entities to determine its effect on their accounting and their operations. As software and SaaS entities have delved into the details, most have found that the new guidance will affect them in some way. Many have found that Topic 606 will affect them significantly. However, the effect of Topic 606 will often vary from entity to entity.

In December 2019, we published an updated edition of KPMG's Handbook, Revenue recognition, which illustrates how Topic 606 applies to common transactions, provides examples about common scenarios, explains our emerging thinking on key interpretative issues and compares the new requirements to legacy US GAAP.

This updated Handbook provides detailed technical guidance on key issues when applying Topic 606 to software licensing and SaaS arrangements, focusing on the implications for US GAAP reporting entities. We address a wide variety of questions that have arisen during the implementation period about the effects of Topic 606 on software licensing and SaaS arrangements. We also address the effects of Topic 606 on many longstanding software and SaaS practice issues, and in both cases, we compare the effects of Topic 606 to legacy US GAAP. We hope this Handbook will continue to advance the dialogue on the issues pertinent to this industry.

Prabhakar Kalavacherla and Scott Muir Department of Professional Practice, KPMG LLP

? 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Revenue for software and SaaS

2

About this publication

About this publication

Purpose

The purpose of this Handbook is to assist you in understanding the new revenue standard, Topic 606, as it applies to contracts with customers in the software and SaaS industry.

This Handbook is intended for use by preparers and other interested parties with a working knowledge of the legacy software industry guidance in Subtopic 985-605, the legacy general revenue guidance in Topic 605 as it applies to SaaS arrangements and the new revenue model in Topic 606.

Organization of the text

Each chapter of this Handbook includes excerpts from the FASB's Accounting Standards Codification? and overviews of the relevant requirements. Our indepth guidance is explained through Q&As that reflect the questions we are encountering in practice. We include examples to explain key concepts, and we explain the changes from legacy US GAAP.

Our commentary is referenced to the Codification and to other literature, where applicable. The following are examples:

-- 606-10-25-16 is paragraph 25-16 of ASC Subtopic 606-10.

-- ASU 2014-09.BC87 is paragraph 87 of the basis for conclusions to Accounting Standards Update No. 2014-09.

-- TRG Agenda Paper No. 30 is agenda paper no. 30 from the meeting of the IASB and the FASB's Joint Transition Resource Group for Revenue Recognition (TRG) held in March 2015.

-- SAB Topic 13 is SEC Staff Accounting Bulletin Topic 13.

Terminology

Throughout this Handbook, the terms `software licensing arrangement' and `SaaS arrangement' are used. A `software licensing arrangement' refers to an arrangement in which a software license is transferred to the customer in accordance with paragraph 606-10-55-54(a). In contrast, `SaaS arrangement' refers to an arrangement that, even if the contract states that a license to software is conveyed, a license does not exist in accordance with paragraph 606-10-55-54(a) because the hosted software does not meet the criteria in paragraph 985-20-15-5.

This distinction is important because, under Topic 606, the licensing implementation guidance, including that related to sales-based and usage-based royalties, does not apply to SaaS arrangements. SaaS arrangements are accounted for as service obligations, subject to the general revenue model. The first section of the `Software and SaaS Industry Overview' and Chapter A ? Scope, discuss the requirements for distinguishing between a software licensing arrangement and a SaaS arrangement in further detail.

? 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Revenue for software and SaaS

3

About this publication

Accounting literature

Unless otherwise stated, references to the revenue standard and/or Topic 606 comprise all of the following Accounting Standards Updates issued prior to Topic 606's mandatory adoption date:

-- No. 2014-09, Revenue from Contracts with Customers (Topic 606)

-- No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

-- No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

-- No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting

-- No. 2016-12, Revenue from Contracts with Customers (Topic 606): NarrowScope Improvements and Practical Expedients

-- No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.

-- No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments

-- No. 2017-14, Income Statement--Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403

Pending content

In some cases, the Codification is subject to content that becomes effective after the revenue standard. For example, Accounting Standards Update No. 2016-13, Financial Instruments--Credit Losses (Topic 326), includes consequential amendments to Topic 606.

When an excerpt from the Codification is affected by pending content:

-- the specific sentences that have been superseded are underlined; and -- the amended sentences are included at the end of the excerpt, marked as

pending content.

The transition dates for pending content are shown based on their general applicability to public entities (P) and non-public entities (N). See the relevant Topic to determine the specific transition requirements and whether a public entity may qualify to adopt the pending content at the non-public entity date.

? 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download