A Quick Cheat Sheet on Revenue Recognition in Software Licensing Agreements


What’s “revenue recognition?”

Some quick definitions from Investopedia (emphasis mine):

“The revenue recognition principle, a feature of accrual accounting, requires that revenues are recognized on the income statement in the period when realized and earned—not necessarily when cash is received.

Realizable” means that goods or services have been received by the customer, but payment for the good or service is expected later.

Also, there must be a reasonable level of certainty that earned revenue payment will be received.

Lastly, according to the matching principle, the revenue and its associated costs must be reported in the same accounting period.”


Most Favored Nations Clause Map


How does revenue recognition come into play in software contracts?

“Issue” examples in Software Licensing Agreements:

1. Refund rights are the biggest and most obvious example you see – beware.
2. MFN clauses that would cause an automatic change in the price during the life of the contract are a common example.
3. For example, providing a 90-day warranty period on software that hinges off something silly, like a 99.9% uptime and gives them the right to cancel if not met.
4. Forgetting to add language in the survival clause around payment obligations surviving termination.
5. Defining the duration or timing of performance in vague and ambiguous terms can potentially cause issues.
6. Non-cash consideration causes complexities.
7. Avoid Extended Warranty beyond standard 90 days
8. Any delivery acceptance terms beyond “acceptance to conform to [Company] Documentation.”

For a deeper dive Google “ASC 605” and “ASC 606.”