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.