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Prior to the adoption of ASC 606, ASC 985-845-25 provides the guidance for a software vendor's exchange of a license to its software for a license to the customer’s technology. The license to the customer's technology permits the software vendor to sublicense the customer’s technology to others as a component of the software vendor’s products or as a stand-alone additional product.
An exchange of a product or property held for sale in the ordinary course of business for a product, or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange, should be recorded at carryover book basis. However, if the technology or products the software vendor received in the exchange were to be sold, licensed, or leased in a different line of business from the products relinquished, the exchange must be assessed for commercial substance. If the exchange has commercial substance, it should be measured at fair value, provided that:
1.
The fair value of the technology or products exchanged or received can be determined within reasonable limits (i.e., there exists vendor-specific objective evidence of the fair value of the software given up, or the fair value of the technology or products received, as if the software vendor had received or paid cash); and
2.
The technology or products received in the exchange are expected, at the time of the exchange, to be deployed and utilized by the software vendor and the value ascribed to the transaction reasonably reflects such expected use.
ASC 985-845-25 clarifies that a license to use software is property held for sale in the ordinary course of business akin to inventory, as are rights to further develop and embed technology received into a product accounted for pursuant to ASC 985-605. The evaluation of barter transactions involving software can be particularly problematic, given a nominal amount of cash invested in the "inventory" that is exchanged. Thus, in a transaction in which software held for sale in the ordinary course of business is exchanged for internal-use software, the entity needs to consider if it is probable that the value assigned to the internal-use software asset received is realizable.
For barter transactions not involving software, an entity should evaluate whether it would have purchased the asset received in a cash transaction for the amount to be assigned in the barter transaction. If not, then the entity should evaluate whether the accounting is consistent with the substance of the transaction.
If neither the fair value of the technology or products exchanged nor the fair value of the technology or products received can be reasonably determined, then the exchange should be recorded at carryover book basis.
ASC 985-845-25 was superseded by ASC 606. Refer to RR 4.5 for details regarding the estimation and accounting for noncash consideration and RR 9 for discussion regarding the recognition of revenue associated with licenses.
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