Fees and Costs Incurred for The Software Sold in 2019 Memorandum

Description

Option #2: Codification to Research a Complex Accounting Issue: Accounting for Software Development Activities

Note:  For this Portfolio Project, please check with your instructor for instructions, including the username and password, which CSU-Global pays for and provides for access to the FASB Accounting Standards Codification (ASC) which you will need.

Read the Accounting for Software Development Activities Case Study (link below). After reading the case study, answer the questions provided.

While Ms. Larson is confident with the U.S. GAAP reporting of the CRM system developed in 2018 and used by MRM, she is less certain of the accounting for the software product developed for customers in 2019 due to the unique nature of the transaction as it relates to the company’s business. You have been asked to research the relevant guidance to determine the proper course of action for the 2019 financial statements. Specifically, Ms. Larson is interested in how the fees paid to ZD for the activities from March 1 to August 31 should be accounted for and how these costs, along with the fees generated from the three customers, should be presented on the 2019 financial statements. 

As part of this task, perform the following activities:

First, consult the Financial Accounting Standards Board Accounting Standards Codification® to find appropriate guidance on the issues presented in the case. 

Next, prepare the following three responses in paper format:

1.Prepare a detailed 3-page minimum double-spaced memorandum and analysis to Ms. Larson that includes the relevant issues for this situation, the appropriate financial reporting guidance, and your conclusion regarding the treatment of the fees generated and costs incurred for the software sold in 2019.

2.Prepare a detailed 3-page minimum double-spaced memorandum and analysis of Ms. Larson’s accounting for the CRM system in 2018. Specifically, determine whether her decisions regarding the (1) capitalization versus expensing of costs and (2) amortization of the CRM system are supported by U.S. GAAP. Address the specific evidence from the case, the relevant guidance from the Financial Accounting Standards Board Accounting Standards Codification®, and make adjustments, if any, to the 2018 financial statement.

3.After reviewing the following additional details, prepare a 3-page double-spaced memorandum and analysis summarizing the issues identified, and then providing guidance and a conclusion with appropriate treatment of each issue.

Additional details:

MRM management felt that its first three software clients could play a crucial role in MRM’s future strategy to create market awareness for its software product. Through discussions with the three companies, MRM management learned that each company was scheduled to participate in industry conventions in the first quarter of 2020. 

According to the clients, these conferences typically provide companies and their employees the opportunity to interact with industry association members and competitors and discuss industry-specific developments. 

Companies normally receive booth space in the main convention area, and some of the industry participants give presentations in adjacent conference rooms on topics of interest. 

MRM management believed that these conferences would be a strategic venue to market their software products. However, admission to the conferences was exclusive to industry participants who paid significant association dues, and thus MRM had no way of attending the conferences independently, nor did they have established business connections with other companies within these industries. 

Because of the significant opportunity, though, MRM management asked the three initial clients if they would promote the product at their respective conventions. Specifically, MRM wanted the companies to offer a demonstration of the software to other conference attendees and devote booth space to marketing pamphlets for the software. 

Each company agreed to MRM’s request, but demanded a substantial fee given the significance of the promotional efforts and the uniqueness of such activity at the conferences. As such, MRM’s sales contracts for each of the three customers included an agreement for the customers to provide the software demonstrations and display pamphlets in exchange for a fee of $15,000 (for a total of $45,000), payable on December 19, 2019.

Considering the evidence from the case, including the additional information provided, identify the revenue recognition issues that potentially impact the accounting for the sales contracts in 2019. In the process, research the appropriate guidance from the Financial Accounting Standards Board Accounting Standards Codification® to determine how these issues should be addressed.

Note that the case highlights MRM’s development of an internal-use system in 2018 that they subsequently develop further into a product that is sold. Though it is possible to determine or assume that the costs incurred in 2019 are subject to ASC 985-20 since the costs relate to a software product that is to be sold to customers, one should only come to that conclusion after consulting other areas of the Codification.
You need to cite the specific ASC to support your discussion. For example, ASC 350-40-35-7 through ASC 350-40-35-9 address the issue of internal-use software that is converted into marketed software.
Also note that:
ASC 350-40-25-1 through ASC 350-40-25-6 discuss the general accounting guidelines for the costs incurred during the software development process.
Since ZD built the new software product and lined up commitments from the first three customers, questions may arise as to the extent of MRM’s role in providing the software to the customers. The text indicates that MRM controlled the development of the software product, assumed the risks associated during and after the development of the product, and was responsible for fulfilling the contract with the end customer. Accordingly, MRM cannot be considered as an agent in the sales transaction, and thus recognition at the gross amount is appropriate in accordance with ASC 606-10-55-37B.
Several revenue recognition issues potentially impact the sales contracts between MRM and its three initial clients. Check the relevant sections of Topic 606 in the Codification, and the facts from the case that relate to the issues.
According to ASC 350-40-15-2A:
Internal-use software has both of the following characteristics:
a. The software is acquired, internally developed, or modified solely to meet the entity’s internal needs.
b. During the software’s development or modification, no substantive plan exists or is being developed to market the software externally.
Note that MRM is selling a software program to the three clients, and the company also pays the clients for advertising of the product. Guidance from Topic 606 dictates that companies like MRM must determine the nature of the consideration payable, as it could impact the timing and amounts of revenue recognition.

Explanation & Answer length: 9 Pages

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