Well, most software consultants won’t need to know this, but if you are a technopreneur, sooner or later you’ll need to know this, either as part of financial management in your venture or when you’re writing up a business plan. The main reference for this will be Financial Accounting Standard (FAS) number 86, issued by Financial Accounting Standard Board (FASB) in US.

There are 3 main revenue streams for software consulting companies:

  1. Software license revenue. This gives the customer a permission to use the software. There’s no intellectual property transfer whatsoever happening here
  2. Implementation service revenue. This is what the customer pays for the consulting company to send its consultants to install, customise, train, and prepare the software for use on the customer’s sites
  3. Support service revenue. This covers the on-going technical support from the consulting company which may be needed throughout the life time of the software
Programmer
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And on the operation side, there are 3 main teams within software consulting companies:

  1. Development team, which designs and develops additional features as well as fixes malfunctions (bugs) in the software
  2. Consulting team whose main job is to come to customer’s sites and prepare its users to use the new software
  3. Support team, responsible for assisting the customer with any technical difficulties they may need during the use of the software

Now, here are some of the guide lines for accounting in such a company:

Assets

  • You can only account the intellectual property of your software as intangible fixed asset if the feasibility of the software in the market has been established, that is only after there is positive indicator of customer purchase
  • Since development team does both new feature development as well as bug fixes, you can capitalise part of wage of development team
  • Difference of implementation service revenue recognized (see revenue section below) and actual implementation service invoice will be represented on balance sheet as Work-In-Progress in Excess of Progress Billing

Liabilities

Even though invoices for support service are usually presented to customers in advance for the amount of the whole year, it can not be wholly recognised as revenue right away. Instead, it should be booked as unearned revenue, which will be amortised to income statement at the end of each accounting period

 

Australian bank notes
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Revenues

  • Revenue from software license can be recognised upon delivery of software CD & license invoice
  • Revenue from implementation services can be recognised at each end of accounting period using percentage of completion method, based on latest sign-off forms and additional provision to account for time lapse between latest sign-off and period end
  • Revenue from support services can be recognised at each end of accounting period using pro-rate method for the duration of the contract

Expenses

  • Since development team does both new feature development as well as bug fixes, remaining part of wage of development team, after deduction for capitalisation (as described in Assets section above), will be considered maintenance cost and charged as period expense
  • Wage of implementation team will be recognized as period expense, matched to periodic recognised revenue of implementation services mentioned above
  • Wage of support team will be recognized as period expense, matched to pro-rated revenue from support services mentioned above
•    Difference of implementation service revenue recognized and actual implementation service invoice will be represented on balance sheet as Work-In-Progress in Excess of Progress Billing
•    Technological feasibility of NextG is considered to have been established firmly as it is now in use by 2 general insurers. However since development sub team does both new feature development as well as bug fixes, 50% of wage of development sub team will be capitalized as per FAS 86
•    Revenue from software license will be recognised upon delivery of software CD & license invoice
•    Revenue from implementation services will be recognised at each end of accounting period using percentage of completion method, based on latest sign-off forms and additional provision to account for time lapse between latest sign-off and period end
•    Revenue from support services will be recognised at each end of accounting period using pro-rate method for the duration of the contract
•    Since development sub team does both new feature development as well as bug fixes, 50% of wage of development sub team will be considered maintenance cost and charged as period expense as per FAS 86
•    Wage of implementation sub team will be recognized as period expense, matched to periodic recognised revenue of implementation services mentioned above
•    Wage of support sub team will be recognized as period expense, matched to pro-rated revenue from support services mentioned above
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