Based on the June 6, 2012, OBA Session with the same title
featuring keynote speakers Joyce Lam (Deloitte) and
Wendy Gross (Osler).
A common and often misunderstood point of conflict in
negotiating technology and software licensing agreements is revenue
recognition. Often, commonly sought contractual protections for
customers or licensees can lead to objections from suppliers or
licensors based on their ability to recognize revenue from the
transaction. At times there may be a real risk, but frequently
misunderstandings about revenue recognition can cause a molehill of
an issue to become a mountain of a roadblock to finalizing the
This blog post summarises some of the key points arising out of
the OBA Technology and E-Commerce session on revenue recognition in
technology contracting and software licensing held on June 6, 2012.
A recording of the session is available.
Principles of Revenue Recognition
The overriding principle in revenue recognition is that revenue
is recognized when it is realized (or realizable) and when it is
earned. What follows is a table prepared by Joyce Lam that
identifies the high-level criteria used under US GAAP and IFRS to
make this determination:
Persuasive evidence of an arrangement
Delivery has occurred or services have been rendered
Fee is fixed or determinable
Collectability is reasonably assured
Significant risks and rewards have been transferred
No involvement usually associated with the ownership or control of
Amount of revenue can be reliably measured
Probable that economic benefits will flow to the entity
Costs can be measured reliably
Key Observation for Technology Contracting and Software
The key observation about the principles of revenue recognition
for purposes of negotiating technology and software licensing
agreements is that absolute certainty is not required. Suppliers
and licensors are able to recognize revenue based on their
reasonable expectations. For example, where a customer or licensee
requests warranty protections or a right to receive a refund in
limited, defined circumstances (e.g., software fails to meet
specified acceptance criteria) the supplier or licensor can use its
reasonable expectation (e.g., based on its track record with the
same or similar software) to recognize the bulk of the revenue.
Often times it is a lack of understanding regarding this point
that causes revenue recognition to be a red herring in technology
and software licensing negotiations. If a supplier doesn't have
a reasonable expectation that it can achieve a warranty obligation
or meet specified acceptance criteria, negotiations should focus on
the warranty obligation or acceptance criteria rather than on
whether or not the supplier will be able to recognize revenue.
Revenue recognition can be a complex and difficult issue, but a
little knowledge about how it works can help you avoid having it
sidetrack or stall technology and software licensing
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Software license agreements generally require the customer to pay fees for the software license and related services, which fees are usually based upon the duration of the license and the manner in which the customer is allowed to use the software, together with applicable taxes and withholdings.
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