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How to recognize revenue in subscription agreement?


We are revising our software licenses to be "all-inclusive," meaning there is one price for a term that includes the license, maintenance, and services. Most agreements are three years. How do we recognize revenue under GAAP?


The accounting treatment depends on the specifics of your obligations to customers under the new subscription arrangement.

For example, if the subscription agreement states that you are granting the right to use the license as well as agreeing to provide maintenance and services throughout the full 3 year term, then the revenue recognition should occur on straight line basis over the 3 years (i.e. after one year, you should have recognized one-third of the revenue under the agreement because you have fulfilled one-third of your 3 year obligation).

However, if the subscription agreement grants the right to use the license and agrees to provide maintenance throughout the full 3 year term but only agrees to provide a fixed set of services (whether limited by time or deliverables), then you will need to allocate a portion of revenue to services and recognize the revenue for those services as they are delivered while recognizing the remaining revenue allocated to license and maintenance on a straight line basis over the 3 year term.