Revenue Recognition Policy of a Software House

[iahmad]

Any one has any idea about the revenue recognition policy of software house, which is in compliance with IFRS. IAS 18 "Revenue" only discuss "Revenue from Services", further it only deals with the revenue form services of a Software company.
How and when a company should recognize a revenue from sale of a licence? If the software takes 3 years to complete, with an estimated cost of $30 Miliion, how and when revenue could be recognized? If on percentage of completion basis, then who will determine, and how the percentage of completion?
Thnaks

[Moon]

Well ahmed, i could not get your question. You are talking about two different situations, if i am not wrong.

One, a software house programs a software for at its own like Quick book, and then make it available in the market. And then sells this product to a customer at the price set by the house.

Two, a software house enters into an agreement with a party to program a software for it. All the terms and conditions including the delivery of product, the invoicing terms, the maintenance terms, ownership terms are there.

Now you please make this clear, of which situation you are talking about as in both situations the pattern of revenue recognition shall be different.

Regards.

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[iahmad]

software house enters into an agreement with a party to program a software for it. All the terms and conditions including the delivery of product, the invoicing terms, the maintenance terms, ownership terms are there. The software takes 3 years to complete. What should be the
annual revenue? Total contract cost let say $ 30 Million.

[Moon]

Where the agreement contains invoicing terms, this means when and how the invoices are raised revenue will be recognized on the basis of those invoices. This practice is followed by most of the organization in the software industry. It is very difficult to determine the stage of completion of a software that is under construction as a little mistake in the programming can destroy the entire project and you would be say back to 25%. SO invoicing is considered as a reasonable basis for revenue recognition.

Well as regards the question of cost, it would be recognized as and when incurred and charged to particular cost center.

If you have explored something diff. plz let me know coz this is very interesting example to understand revenue recognition in software industry.

Regards.

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If you are a politician then you are a lier, but if you are a lier you may not be a politician!