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FRS102 Revenue Recognition Hardware and Software

Recognising Revenue for specialised hardware

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Hi all,

A non-COVID-19 related question:

I have a client who sells specialised hardware and software that can only be used together. The software is useless on its own and the hardware cannot be used with other software. Up until now, they just sold both on a straight sale. Now they are thinking of going along the SaaS model.

The customer will pay an upfront fee (to cover the cost of the hardware) and then an annual fee going forward. The agreement will be for 5 years. The hardware generally lasts for about 5 years before needing to be replaced.

So my questions are, do I recognise income on a straightline basis over the 5 years as the contract will be performed over the 5 years? Or do I load more revenue into year 1 (for the cost of the hardware) and recognise the software over the 5 years.

Do I include related expenses (hardware, commission etc) in year 1 or also spread those over the 5 years.

After some research I am thinking of spreading all Revenue over 5 years evenly and recording costs in the year they occur but I would appreciate any help.

Sorry, my brain is fried from all the COVID nonsense.

Thank you for any assistance.

Replies (4)

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By paul.benny
08th Apr 2020 08:43

FRS102 requires you to break down the elements of the sale into its separately identifiable components - here the hardware and the software. That would mean you recognise the revenue on the hardware in year, together with a proportion of the software charge for that year.

The most straightforward way to do this is to take the aggregate income and costs over the initial contract term to determine the contract margin. Then you can gross up the costs in each year to determine the revenue.

Difficulty may arise with determining amount to attribute to each sale for the software because typically there is a high development cost but the cost of each copy is approximately nil.

The method you suggest of straightlining the entire amount would result in costs being parked on the balance sheet and so is unwise.

Thanks (1)
Replying to paul.benny:
By Cardigan
08th Apr 2020 09:07

Thanks for your help with this Paul. That makes sense.

I wasn't sure if the hardware and software were separately identifiable because they are not separately usable.

Thanks (0)
Hallerud at Easter
08th Apr 2020 09:05

What happens if the hardware packs in during the five years, does the seller need to replace for free or does the customer need to pay again for the hardware?

Thanks (1)
Replying to DJKL:
By Cardigan
08th Apr 2020 09:08

The hardware will be replaced by the seller for free. We are accruing for replacement costs based on the expected failure of units.

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