A software company enters into a contract to license its IP for 3 years and provide monthly updates that are critical to the IP's utility. Without the updates, the software loses significant value. How should the revenue be recognized?

Answer options:

Recognize the license revenue at point of time (inception) and updates over time.

Recognize the entire transaction price over time (3 years).

Recognize the entire transaction price at the point of time (inception).

Recognize revenue as billed.

How to approach this question

Determine if the license is 'Functional' (point in time) or 'Symbolic/Access' (over time). If updates are critical to utility, it's a right to access (over time).

Full Answer

B.Recognize the entire transaction price over time (3 years).✓ Correct

Because the updates are critical to the utility of the software, the license is not distinct from the support. It represents a 'right to access' the entity's intellectual property, which is a performance obligation satisfied over time.

Common mistakes

Treating all software licenses as point-in-time.

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