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Revenue Recognition: Pre-Sale Hours

We recently signed a software license agreement which is subject to contract accounting due to significant enhancement. Therefore, we're going to use input method to recognize revenue based on % of completion. And prior to the contract signing, we work quite a bit of hours in good faith, knowing the contract will be signed for sure. The question is whether those in-good-faith hours can be accounted for as the efforts expended when it comes to revenue recognition.

Answers

Topic Expert
J.D. Floyd
Title: Owner, CFO
Company: CFO Outsourcing Solutions, Inc.
(Owner, CFO, CFO Outsourcing Solutions, Inc.) |

I believe that there are several questions to ask first; when you say "good faith" hours, what did you accomplish? If in fact these hours where to produce the true end product, there is some support for Revenue (I emphasis some). However, if these hours are to produce a "proof of concept" or just a demo, then it is more supportive of R&D. So, I would ask for more details.

J.D. Floyd

Anonymous
(Sr. Revenue Manager) |

Thank you for your advice. Those "good faith" hours were worked by our engineering and services team, aiming to deliver the deliverables set forth in the too-be-signed contract. They were not for the purpose of producing a "proof of concept" or performing a demo for our customer in this case.

Anonymous
(CFO) |

In my current company, part of which develops websites for clients, I changed the revenue recognition policy to recognize 20% of revenue upon signing of Contract. I justified this to the auditors by laying out the upfront design work done in anticipation of the completed contract. Approximately 20% of the total design and coding work is done before the contract is signed. The auditors signed off on this policy.

Anonymous
(Sr. Revenue Manager) |

That is good news. Thanks so much.

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