Indregning af omsætning på multiple elementer

Katarina Holm

Student thesis: Master thesis


Software is often sold in conjunction with hardware or service agreements which, for the purpose of accounting, is referred to as a multiple element arrangement. Multiple element arrangements represent a complex accounting issues regarding the requirement to separate and fair value the components of transactions, as well as the appropriate application of percentage of completion methods rendering services. Determining how and when to recognize revenue for software sales is often a very challenging accounting issue for software companies. The guidance for revenue recognition in accordance with IFRS can be found in IAS 18, Revenue (“IAS 18”). IAS 18, Paragraph 3 requires that the revenue recognition criteria are to be applied to each separate element of a multiple deliverable transaction to reflect the substances of the transaction. The standard, however, does not give further guidance on how to separate elements in a multiple element arrangement. Further guidance can be found in IAS 11, Construction Contracts, (“IAS 11”) Paragraph 8. This standard requires that when a contract covers a number of assets, and the following criteria are met, the construction of each asset shall be treated as a separate element. The specific criteria are that separate proposals has been submitted for each asset, each asset has been subject to separate negotiation, and the cost and revenues can be identified for each asset. In spite of the guidance in IAS 11 and IAS 18, it can still be unclear how to identify individual elements in practice. Inspiration can therefore be found in the U. GAAP Accounting Standards Codification 605-25, Revenue Recognition, Multiple Element Arrangements. However, the use of guidance from US GAAP still must be in accordance with IFRS to be used. The criteria in ASC 605-25 states that in order to separate element of an agreement the elements each need to have a standalone value to the customer. The standard further states that if the arrangement includes a general right of return relative to the delivered items it is should be considered probable and substantively in control of the company. To assess whether the criteria in ASC 605-25 are met, an analytical assessment should be done to understand the criteria and to determine what a software company is to do in each situation where they have entered into a agreement with multiple elements. A good way to analyze these criteria is the use of a decision tree, which companies could use to assess their agreement with multiples elements and to decide if the agreement can be separate or not. All of the separation criteria have to be met in order for a delivered item to be accounted for as a separate unit. An assessment of each criterion requires careful analysis of the applicable facts and circumstances. If not all of the separation criterion are met for a delivered item in a multiple-element arrangement, the delivered item is to be accounted for as a combined unit of accounting with the undelivered item. To demonstrate how the criteria could be analyzed, I have created a decision tree by using the above criteria on a fictitious case as an example, which shows how each criterion should be analyzed. This is done to show how these criteria can be used in practice. Even though inspiration can be found by guidance in US GAAP, it is not easy for companies to apply the criteria to the revenue recognition related to multiple element arrangements. The revenue recognition policies and the period in which revenue should be recognized can be impacted by the inclusion of multiple deliverables in a sales arrangement. As such, software companies have to look at the facts and circumstances of each arrangement that includes multiple elements and should perform thorough analysis before determining the appropriate method of revenue recognition as each agreement is unique.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2010
Number of pages85