Founded in 1989, Brio Software, Inc., helps Global 3000 companies improve business performance by creating new value from existing information systems and, ultimately, aligning everyone in the enterprise with key corporate goals. Brio’s business intelligence software lets companies access, analyze, and share information, offering users relevant, accurate, and timely insight into the variables that impact their business. With this insight, companies can make superior business decisions.
The following information appears in Brio Software’s 10-K report regarding its revenue recognition policies:
Revenue Recognition
Brio derives revenues from two sources, perpetual license fees and services. Services include software maintenance and support, training and consulting, and system implementation services. Maintenance and support consist of technical support and software upgrades and enhancements. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in the amount and timing of Brio’s revenue for any period if different conditions were to prevail.
Brio applies the provisions of FASB ASC Section 985-605-25: Software—Revenue Recognition—Recognition to account for software revenue and FASB ASC Section 605-25: Revenue recognition—Multiple-element arrangements.
Brio recognizes product revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple elements, such as software products and services, Brio uses the residual method under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence (VSOE) of the fair value of such undelivered elements. VSOE of the undelivered elements is determined based on the price charged when such elements are sold separately.
The residual amount of revenue is allocated to delivered elements and recognized as revenue. Such undelivered elements in these arrangements typically consist of services.
Brio uses a purchase order or a signed contract as persuasive evidence of an arrangement for sales of software, maintenance renewals, and training. Sales through Brio’s value added resellers, private label partners, resellers, system integrators, and distributors (collectively “resellers”) are evidenced by a master agreement governing the relationship with binding purchase orders on a transaction-by-transaction basis. Brio uses a signed statement of work to evidence an arrangement for consulting and system implementation services.
Software is delivered to customers electronically or on a CD-ROM. Brio assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Brio’s standard payment terms are generally less than 90 days. When payments are subject to extended payment terms, revenue is deferred until payments become due, which is generally when the payment is received. Brio assesses collectibility based on a number of factors, including the customer’s past payment history and its current creditworthiness. If Brio determines that collection of a fee is not probable, it defers the revenue and recognizes it when collection becomes probable, which is generally on receipt of cash payment. If an acceptance period is other than in accordance with standard user documentation, revenue is recognized on the earlier of customer acceptance or the expiration of the acceptance period.
When licenses are sold with consulting and system implementation services, license fees are recognized upon shipment provided that (1) the preceding criteria have been met, (2) payment of the license fees does not depend on the performance of the consulting and system implementation services, (3) the services are not essential to the functionality of the software, and (4) VSOE exists for the undelivered elements. For arrangements that do not meet these criteria, both the product license revenues and services revenues are recognized in accordance with the provisions of FASB ASC Section 985-605-25. Brio accounts for the arrangements under the completed-contract method pursuant to FASB ASC Section 605-35: Revenue recognition-Construction-type and production-type contracts because reliable estimates are typically not available for the costs and efforts necessary to complete the consulting and system implementation services.
The majority of Brio’s consulting and system implementation services qualify for separate accounting. Brio uses VSOE of fair value for the services and maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Brio’s consulting and system implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. For a fixed-fee contract, Brio recognizes revenue using the completed-contract method. For time-and-materials contracts, Brio recognizes revenue as services are performed.
Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Training revenue is recognized when the training is provided.
Assume that Brio enters into a contract with a customer for deliverable software and services as follows. The prices listed are those quoted in the contract.
Perpetual license fee .......... $ 650,000
Elements undelivered at contract signing:
Technical support .......... 120,000
Training ............... 80,000
System implementation services ..... 100,000
Software upgrades and enhancements ... 50,000
Total contract price ........ $1,000,000

These contract elements, if purchased separately, would be priced as follows:
Perpetual license fee ........ $ 840,000
Elements undelivered at contract signing:
Technical support .......... 120,000
Training .............. 72,000
System implementation services .... 108,000
Software upgrades and enhancements .. 60,000
Total contract price ........ $1,200,000

Required:
1. Following Brio’s stated revenue recognition policies, how much revenue would it recognize on this contract?
2. Prepare the journal entry to record receipt of the signed contract and electronic delivery of the software. Assume that the sale conforms to Brio’s normal billing terms and that collectability is not an issue.
3. How much revenue would Brio recognize on this contract if the various elements included in the contract were not sold separately?