Reference no: EM13827620

Question

Revenue Recognition

Our sources of revenues include: (1) software, which includes new software license revenues earned from granting licenses to use our software products and fees from cloud software subscription offerings, and software license updates and product support revenues; (2) hardware systems, which includes the sale of hardware systems products including computer servers and storage products, and hardware systems support revenues; and (3) services, which includes software and hardware related services including consulting, managed cloud services and education revenues. Revenue generally is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities.

For software license arrangements that do not require significant modification or customization of the underlying software, we recognize new software license revenues when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) the sale price is fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is probable. Revenues that are not recognized at the time of sale because the foregoing conditions are not met, are recognized when those conditions are subsequently met.

The vast majority of our software license arrangements include software license updates and product support contracts, which are entered into at the customer's option and are recognized ratably over the term of the arrangement, typically one year.

Revenues from the sales of our non-software elements are recognized when: (1) persuasive evidence of an arrangement exists; (2) we deliver the products and passage of the title to the buyer occurs; (3) the sale price is fixed or determinable; and (4) collection is reasonably assured. Revenues that are not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met. When applicable, we reduce revenues for estimated returns or certain other incentive programs where we have the ability to sufficiently estimate the effects of these items. Where an arrangement is subject to acceptance criteria and the acceptance provisions are not perfunctory (for example, acceptance provisions that are long-term in nature or are not included as standard terms of an arrangement), revenues are recognized upon the earlier of receipt of written customer acceptance or expiration of the acceptance period.

Our hardware systems support offerings generally provide customers with software updates for the software components that are essential to the functionality of our server and storage products and can also include product repairs, maintenance services and technical support services. Hardware systems support contracts are generally priced as a percentage of the net hardware systems products fees. Hardware systems support contracts are entered into at the customer's option and are recognized ratably over the contractual term of the arrangements, which are typically one year.

Many of our software arrangements include consulting implementation services sold separately under consulting engagement contracts and are included as a part of our services business...Revenues for consulting services are generally recognized as the services are performed.

Our cloud software subscription offerings generally provide customers access to certain of our software within a cloud-based IT environment that we manage and offer to customers on a subscription basis. Revenues for our cloud software subscription offerings are recognized ratably over the contract term commencing with the date our service is made available to customers and all other revenue recognition criteria have been satisfied.

Education revenues include instructor-led, media-based and internet-based training in the use of our products. Education revenues are recognized as the classes or other education offerings are delivered.

We also enter into multiple-element arrangements that may include a combination of our various software related and non-software related products and services offerings including hardware systems products, hardware systems support, new software licenses, software license updates and product support, cloud software subscription, consulting, managed cloud services and education. In such arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements. We then further allocate consideration within the software group to the respective elements within that group following the guidance in ASC 985-605 and our policies as described above. After the arrangement consideration has been allocated to the elements, we account for each respective element in the arrangement as described above.

1. What are the seven sources of revenue for You Guess Computer Corporation?

2. Explain in plain English how You Guess Computer recognizes revenue for each of the seven types of revenue.

3. Assume that You Guess Computer has a sale that involves new software, software license updates and product support for two years, and an educational package for the customer's employees, which will be fulfilled in six months. If sold separately, You Guess Computer would charge the following for each of these elements: $2 million, $300,000, and $800,000. Because the customer buys the entire package, the sales price is $2,635,000. What revenue would You Guess Computer record for each element?

Summary

The question belongs to Finance and it discusses about the sources of revenue for the company, how the company can recognize the sources of revenue and to calculate the revenue earned by selling software packages rather than individual softwares.