Question

Saar Associates sells two licenses to Kim & Company on September 1, 2021. First, in exchange for $118,000, Saar provides Kim with a copy of its proprietary investment management software, which Saar does not anticipate updating and which Kim can use permanently. Second, in exchange for $106,200, Saar provides Kim with a four-year right to market Kim's financial advisory services under the name of Saar Associates, which Saar advertises on an ongoing basis.

The trade name "Saar Associates" is not well known in the marketplace and the owner provides no advertising or other benefits to a licensee of the Saar Associates trade name during the license period.

How much revenue will Saar recognize in 2021 under this arrangement if Saar reports under U.S. GAAP?

Answer 1

Saar Associates will recognize $118,000 in revenue in 2021 under this arrangement if reporting under U.S. GAAP.

Step-by-step explanation:

Under U.S. GAAP, revenue recognition depends on the nature of the performance obligation and the transfer of control to the customer.

In this scenario, Saar Associates has two performance obligations: providing proprietary software and granting a right to market financial advisory services.

For the software, since it's a one-time transfer that doesn't involve ongoing updates, the revenue is recognized when control transfers to Kim, which is upon delivery. Therefore, the $118,000 for the software is recognized as revenue in 2021.

Regarding the right to market financial advisory services, revenue recognition depends on the nature of the license.

In this case, since Saar Associates provides no ongoing support or benefits, and the trade name is not well known, the revenue for the license is recognized upfront. Thus, the $106,200 for the right to market services is also recognized as revenue in 2021.

In summary, the total revenue recognized in 2021 is the sum of the revenues from the software and the right to market services, resulting in a final revenue recognition of $224,200 under U.S. GAAP for Saar Associates in the given scenario.