Valuation of revenue

Question

Our company sells licenses to use softwares developed by our company. There are few contracts in which payment terms exceed more than one year. However, we provide the software key at once and there is no obligation remains on our part.

Consider this scenario:   

Contract date: 20-12-2016

Payment terms: 33% now, 33% in 1 year, 34% after 2 years

My questions is whether we should record whole revue now or should we discount this non-current asset and record revenue on present value of long term receivable receivable.

To elaborate my question:

Say i strike a deal of $ 10M

Option 1: Record $ 10M right away

Options 2: apply discounting on long term receivables (67%) as assuming 10% discount rate as follows:

3.3M * (1.1)^-1 + 3.4M*(1.1)^-2 = 5.8 + 3.3(current) = 9.1M

Therefore recording 9.1M as revenue and recording 0.9M as interest income over the period.

If you need any further clarification on the scenario, please reply.

Answer 1

IFRS 15 is to address this type of scenarios.I think Option 1 seems to be more rational as it appears that there is no performance obligation after you hand over the software key. And then there is no need to allocate the transaction price to the performance obligation.

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Identify the performance obligations in the contract

Identify the performance obligations in the contract

Answer 2

The risk the company estimates for concessions to a creditworthy customer outside the contractual requirements of the arrangement increases as the payment terms are extended over longer periods. 

To overcome the presumption of concessions, in extended payment term arrangements, a company's history should support the current situation. In addition, the number of historical arrangements needed to overcome the presumption of concessions increases with a greater number of instances in which concessions have been given in extended payment term situations in the past. Examples of factors that should be assessed in this evaluation include. It is also important that the software vendor has documented policies for customers that are granted extended payment terms and has sufficient documentation of its adherence to these policies. Evidence should exist that the vendor's business practice of granting extended payment terms is consistently applied based on the population attributes used to define the class of customer. 

Hence, in above situation company has to apply its past experience to decide whether to recognize $10m right away or should apply discounting.