Performance penalty or bonus – Performance penalties or bonuses are variable consideration in a contract for revenue recognition purposes and require judgment and further assessment of a contract’s transaction price at contract inception and, potentially, at each reporting date.Further, if discounts are offered for contract renewal options, further analysis of whether the discount could be considered a material right will be required. Different practices will impact how the discounts are allocated to performance obligations and, therefore, impact revenue recognition. Discounts – Whether discounts to certain goods and services are given consistently or are randomly applied can make a difference when multiple promised goods and services are bundled and sold in one contract.Pricing – Whether price changes deviate from a standard price list or are within the range of a standalone selling price that is set for such a product or service can lead to different accounting conclusions.Fixed price, time and material, milestone, or hybrid – Each type of pricing arrangement will require further analysis and drive the timing and amount of revenue being recognized.This also could impact the accounting model that the company should use for the capitalization of software development costs. The right to convert a SaaS contract to an on-premise arrangement can indicate the performance obligation is to provide a license rather than services (right to use versus a right to access) and, therefore, may change the timing of revenue recognition.Right to take possession of a license during Software as a Service (SaaS) term Right to payment for services performed to date including a reasonable margin upon contract termination may impact whether revenue should be recognized over time or at a point in time for certain contracts such as contract manufacturing.A non-cancelable term or termination without penalty with 30-day notice will impact the determination of contract term for revenue recognition.Six Contract Term Changes That May Prompt Reconsideration of Revenue Recognition Contract Modification Examples That Can Impact Revenue Recognition ASC 606Ĭonsider the following list of important contract terms that, if modified, would require a reconsideration of the appropriate revenue accounting. This review should ideally take place before the contract is executed to enable management to fully understand the impact, if any, of a proposed change in standard terms on revenue recognition. To avoid any unintended accounting consequences, any proposed changes should be closely reviewed by both legal and accounting teams. If any of these standard terms are changed, there could be an impact on revenue recognition. Organizations should establish standard Terms and Conditions, Purchase Orders, and/or Statements of Work along with processes that enable collaborative coordination among sales, legal, and accounting departments to manage revenue transactions. When your sales, legal, and accounting teams do not coordinate on changes to standard contract terms and conditions, this lack of communication can impact revenue recognition and financial reporting-especially for software, technology, and services companies and their inherently complex revenue arrangements. In a fast-paced environment, sometimes departments do not communicate effectively. As a business leader in the technology industry, having every aspect of your organization working toward the same goals is ideal, but can be challenging.
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