The new, principle-based revenue recognition framework won’t be effective until Jan. 1 2017, but all software and cloud computing entities will experience a significant change in top-line revenue. The time to prepare is now. To help your company get started, this overview outlines key features of the new standard. Learn more - http://gt-us.co/1GzJn2B

1. Revenue
recognition
What new requirements mean for the
software and cloud services industry

2. What we'll discuss
1. The changes ahead
2. The 5-Step model for the new revenue recognition standard
3. Timing of revenue
4. What it means for software and cloud services
5. Learn more
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3. The Changes Ahead
INTRODUCTION
There is now a global accounting standard
for revenue recognition.
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4. The Changes Ahead (cont.)
INTRODUCTION
• ASU 2014-09 has many software and cloud services companies
wondering how they will be affected
o ASC 605-25, Revenue Recognition: Multiple-Element Arrangements, and
most of ASC 985-605, Software: Revenue Recognition, are superseded
and replaced by ASC 606. ASC 606 applies to all software and cloud
services arrangements; entities are no longer required to determine
which guidance applies to cloud services arrangements.
o Effective for public entities in annual periods beginning after Dec.
15, 2016, and for private entities beginning after Dec. 15, 2017
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5. The 5-Step Model for the New
Revenue Recognition Standard
(ASC 606)
1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when the entity satisfies each performance
obligation
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6. Get the full story
Resources on grantthornton.com
• Software and cloud services -- the new revenue standard
• A shift in the top of the line: A new global standard on accounting for
revenue
• Impact of new revenue recognition guidance on software and SaaS
companies webcast
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7. Timing of revenue
• Variable pricing
• Credit risk
• Time value
• Contract costs
Revenue is recognized as the work is performed if
control over the promised goods or services is
transferred to the customer over time.
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8. Timing of revenue: Specific Issues
• Noncash consideration
• Rights of return and other customer options
• Supplier repurchase options
• Warranties
• Principal versus agent (gross versus net)
• Licensing intellectual property
• Breakage
• Nonrefundable upfront fees
• Consignment and bill-and-hold arrangements
ASC 606 also provides specific guidance on various
other transaction types, including:
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9. Timing of revenue: Disclosures
• Customer contracts, such as the remaining performance
obligations (backlog)
• Key judgments made
• Contract costs recognized as assets
• The customer simultaneously receives and consumes the
benefits
• The customer controls the asset as it is created or enhanced
• The asset has no alternative use, and the supplier is entitled to
payment for performance-to-date and expects to fulfill the
contract
ASC 606 will require considerably more disclosure
about revenue, including information regarding:
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10. Timing of revenue: Multiple-
element arrangements
• The customer benefits from the item on its own or along with
other readily available resources
• The supplier does not provide a significant service of
integrating the various performance obligations
A customer contract may cover a bundle of goods or services.
ASC 606 requires performance obligations to be accounted
for separately if distinct. For example:
If performance obligations are distinct, the contract price is
allocated between them based on the estimated standalone selling
price of each performance obligation.
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11. Timing of revenue: Transition and
effective date
The ASC 606 is effective for public entities in annual periods
beginning after Dec. 15, 2016, including interim periods
therein, and for private entities in annual periods beginning
after Dec. 15, 2017.
Earlier application is prohibited for public entities. Private entities may adopt the
guidance early in years beginning after Dec. 15, 2016.
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12. What it means for the software
and cloud services industries
• Identifying the contract
• Identifying performance obligations
• Evaluating contract
• Determining the transaction price
• Allocating transaction price to performance obligations
• Recognizing revenue—satisfaction of performance
obligations
• Contract costs
• Disclosures
Software and cloud services companies should be
aware of the effects of the new global standard (ASC
606) on:
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13. Contact us
Christine Janis
Professionals Standards Partner, Audit
T 415.365.5438
E christine.janis@us.gt.com
GRANT THORNTON REVENUE RECOGNITION RESOURCES
Matt McCleary
Audit, Senior Manager
T 919.881.2778
E matthew.mccleary@us.gt.com
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