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A reporting entity may enter into a contract with a third party that includes multiple elements, such as a software license, implementation services, hosting services, and training. The consideration paid to the third party should be allocated to each element based on its relative standalone price. After allocation, the accounting for each element (e.g., whether the costs should be capitalized or expensed) will depend on the nature of the cost incurred.
ASC 350-40-30-4 provides guidance on allocating costs to multiple elements in an arrangement.

ASC 350-40-30-4

Entities may purchase internal-use computer software from a third party or may enter into a hosting arrangement. In some cases, the price includes multiple elements, such as the license or hosting, training for the software, maintenance fees for routine maintenance work to be performed by the third party, data conversion costs, reengineering costs, and rights to future upgrades and enhancements. Entities shall allocate the cost among all individual elements. The allocation shall be based on the relative standalone price of the elements in the contract, not necessarily separate prices stated within the contract for each element. Those elements included in the scope of this Subtopic shall be accounted for in accordance with the provisions of this Subtopic.

The concept of “relative standalone price” is similar to the concept of “relative standalone selling price” described in ASC 606 (see RR 5.2 and RR 5.3). It represents the price at which a reporting entity would purchase an element of a contract separately. Determining the relative standalone price of the various elements in the contract may require the use of estimates. Management should consider all relevant information, such as information from the negotiation process with the vendor, in estimating the standalone price. A reporting entity should not assume that the price stated within the contract represents the standalone price.
In some arrangements, a reporting entity will pay a third party over time (e.g., a recurring monthly payment) for multiple elements, which could include a software license or implementation services for a cloud-computing arrangement (CCA, see SW 4) that require capitalization at or near the beginning of the arrangement. In this situation, the reporting entity should allocate the total fee to all of the elements and should capitalize the full cost of the license or implementation services received, with a liability for any amounts not yet paid based on the terms of the contract. Said differently, regardless of the timing of payment, an asset is recognized for those software costs that are capitalizable when the related licenses or services are received.
Example SW 3-1 and Example SW 3-2 illustrate the accounting for a multiple-element software arrangement.
EXAMPLE SW 3-1
Allocating costs for a multiple-element software arrangement (on-premises software)
Data Analytics Co enters into an agreement with Software Co to license on-premises data analytics software. The contract also includes routine maintenance of the software and training for employees of Data Analytics Co. Additionally, Data Analytics Co engages the same vendor to perform data conversion and configuration services as part of implementing the new software. The total contract price is $10 million, payable at contract inception.
Software Co offers the software and maintenance services separately for $7 million and $1 million, respectively. Software Co does not offer the training, data conversion, or configuration services separately; however, Data Analytics Co obtained information about pricing from other vendors in the vendor selection process. Data Analytics Co uses this information to estimate standalone prices for the training, data conversion, and configuration of $0.5 million, $2 million, and $1.5 million, respectively.
How should Data Analytics Co account for each element in the agreement?
Analysis
Data Analytics Co should allocate the contract price of $10 million to each of the elements in the contract based on their relative standalone price.
Element
Standalone price
Allocation % *
Allocated amount
Software license
$7,000,000
58%
$5,800,000
Maintenance
1,000,000
8%
800,000
Training
500,000
4%
400,000
Data conversion
2,000,000
17%
1,700,000
Configuration
1,500,000
13%
1,300,000
$12,000,000
100%
$10,000,000
* The allocation percentages have been rounded for presentation purposes.
The amounts allocated to the on-premises software license, as well as the configuration services, should be capitalized in accordance with internal-use software guidance. The amount allocated to maintenance, training, and data conversion services should be expensed as incurred. Because Data Analytics Co pays the total contract price upfront, any amounts prepaid for these services should be initially recognized as a prepaid expense.

EXAMPLE SW 3-2
Allocating costs for a multiple-element software arrangement (on-premises software and software as a service)
Data Cloud Co enters into a three-year noncancellable agreement with Computing Co to license on-premises data analytics software and to access Computing Co’s cloud-based customer relationship management (CRM) platform (a SaaS arrangement). The agreement does not give Data Cloud Co the right to take possession of the CRM software. Additionally, Computing Co will provide implementation services to customize and configure the SaaS offering. The total contract price is $9 million, with equal monthly payments of $250,000 over the three-year contract period.
Computing Co offers the on-premises software and SaaS separately for $5 million and $6 million, respectively. Computing Co does not offer the implementation services separately; however, Data Cloud Co obtained information about pricing from other vendors in the vendor selection process. Data Cloud Co uses this information to estimate a standalone price of $1 million for the implementation services.
How should Data Analytics Co account for each element in the agreement?
Analysis
Data Cloud Co should allocate the contract price of $9 million to each of the elements in the contract based on their relative standalone price.
Element
Standalone price
Allocation % *
Allocated amount
Software license
$5,000,000
42%
$3,780,000
SaaS
6,000,000
50%
4,500,000
Implementation services
1,000,000
8%
720,000
$12,000,000
100%
$9,000,000
* The allocation percentages have been rounded for presentation purposes.
The amount allocated to the on-premises software license and the SaaS implementation services (refer to SW 4) should be capitalized in accordance with internal-use software guidance. The amount allocated to the SaaS should be expensed over the contract term. Because the contract price will be paid monthly over the three-year contract, Data Cloud Co will initially record a liability for the amounts allocated to the software license and the capitalizable implementation services as they are received. For example, assuming the software license and implementation services are received in the first month, and the $250,000 billing occurs at the end of the month, Data Cloud Co would record the following entry (excluding the amortization of the software license and the capitalized SaaS implementation costs):
Internal-use software
3,780,000
Capitalized implementation costs
720,000
Operating expense
125,000 *
           Accounts payable (billed)
250,000
           Accrued expenses (unbilled)
4,375,000
* $125,000 (one month of SaaS) = $4,500,000 (SaaS) / 36 months (noncancellable term of the SaaS agreement)
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