A software company sells a license for its software along with a 1-year technical support contract. The software is functional without the support, but the support is critical for updates and security. The customer can use the software immediately. <br/><br/>How should the revenue be recognized?

Answer options:

Recognize all revenue at the point of sale.

Recognize all revenue ratably over the 1-year period.

Allocate the transaction price between the license and the support. Recognize license revenue at the point of sale and support revenue over the 1-year period.

Recognize revenue when the support contract expires.

How to approach this question

Identify Performance Obligations. Is the license distinct? Yes (functional without support). License = Point in Time (Right to Use). Support = Over Time.

Full Answer

C.Allocate the transaction price between the license and the support. Recognize license revenue at the point of sale and support revenue over the 1-year period.✓ Correct

Under ASC 606, if the software is distinct (functional on its own), the license revenue is recognized when control transfers (point in time). The support service is a separate performance obligation satisfied over time.

Common mistakes

Bundling them into a single obligation when they are distinct.

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