Question

Saar Associates sells two licenses to Kim & Company on September 1, 2021. First, in exchange for $100,000, 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 $90,000, Saar provides Kim with a three-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 would recognize a total revenue of $190,000 in 2021 under U.S. GAAP from the sale of proprietary software and the rights to use its trade name, as both performance obligations are satisfied on the sale date, September 1, 2021.

Step-by-step explanation:

Revenue Recognition for Saar Associates Under U.S. GAAP

Under U.S. GAAP, revenue is recognized when it is earned and realizable, which occurs when the following criteria are met identification of the contract with a customer, identification of performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when the entity satisfies a performance obligation.

For the first license regarding proprietary investment management software, the revenue of $100,000 is recognized in full at the point of sale, as the software is delivered and the company does not anticipate updating it, which means the performance obligation is satisfied on September 1, 2021.

For the second license concerning the right to market under the Saar Associates trade name for three years, without additional benefits such as advertising from Saar, revenue recognition would also occur at the point of sale unless there are specific terms indicating otherwise. Since there are no ongoing obligations and the trade name is not well known, suggesting minimal future involvement, it's likely that the entire $90,000 will be recognized on September 1, 2021. Thus, Saar Associates would recognize a total revenue of $190,000 in 2021 under this arrangement.