Revenue Recognition: Case Study of Harvard Business Publishing

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Revenue recognition is an accepted principle that outlines specific measures and conditions for identifying revenue. The guiding standards for this study are the Australian Accounting Standards. The standards handle evolving models delivered over a period (AASB 15:18). The business of research is the Harvard Business Publishing (HBP) because it has to make revenue recognition changes for upgrading its software product version 11.0, Harvard Manage-Mentor (HMM11) to type12.0 (HMM12). Revenue recognition, as per the new rules, has a process and an implication on management and accounting.

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The first step of revenue recognition is the identification of a contract (AASB 15:9). For the HMM11 contract, both HBP and its clients have agreed to the contract and rights of the two parties. HBP has to host software on their servers and meet all the necessary maintenance and operating costs. In cases where the client opted to have the software hosted by the server of HBP, the contract’s specification demanded payment separate 10% of the license fee, hosting fee, an upfront fee. HMM12 has also approved the elements of the contract and details have been outlined. The agreements do not allow clients to host the software, therefore, ruling out payment of hosting cost because only HBP hosts the software.

The performance obligation of the software HMM11 was to sell software rights to different users through issuing licenses at a fee. The client has to incur hosting and maintenance fees if they want their software hosted by the HBP. The software license allows users to improve on different abilities, for example, soft skills. HMM12 contract requires the users to incur a license fee for the right to use the software but HBP incurs the maintenance cost because it is obligated to host for all the users. The software is obligated to be a tool for the course-like curriculum and performance. More updates and a wide variety to meet customer’s requests would be made possible using HMM12, improving the general performance of the software.

The contract price for HMM11 will be from licensing the software and the amount that comes as fees for hosting the software for clients. The separation is because the amount is separate as provided by the contract. The license fee is recorded as the revenue, while the hosting fee is outlined as the deferred revenue. For HMM12, the agreement only gave a provision of pricing to be done on licensing. It is because HBP would host all software for clients, hence no separate fees.

The allocation price of the contract of HMM12 will be higher than that of HMM11 because the HBP will be providing updates and will host the software for its users. If the existing clients convert to use the new software, they will acquire it at a discount of 20% of the total price increase. The reduction is because the new version’s price increased by 18% in 2015 and then by 20% rise in the successive years. HMM11 prices were lower because the hosting and updates cost was separate from the license fee.

HMM11 recognizes the revenue once the license is given because upon access the client is responsible for the maintenance. For a client who pays for the hosting fee, the recognition happens when the necessary maintenance is provided. The performance obligation is also achieved through fixing software bugs for the client. For HMM12, the client had access to the software upon payment of a license, and recognition is achieved when HBP continually provides the updates and maintenance during the contract period therefore recognition is achieved over time.

I would account for HBP by ensuring that every deferred payment appears in the income statement each month when a client is licensed. Comparing this amount with that of the deferred payment in the balance sheet will help analyze deficits and surplus in the revenue (Knorová, 2016). The monthly fee will also aid in knowing the amount owed by clients and tracking monthly income. By the end of the first quarter, it is easy to determine whether revenue meets a specified target or if corrective action needs to be taken.

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The HMM11 to HMM12 financial recognition changes affect the managers of HBP. The implication is because the change will create a need to reassess how the business will be run and the sales levels (Davern et al., 2019). For example, the increase in software prices necessitates more sales personnel to reach the target audience. The HBP management will also have to ensure excellent and sufficient expertise because their server will now host all the software. The team should also develop a strategy of minimizing cost because the HMM12 contract obligates them to incur maintenance costs. Also, the change puts pressure on the managers to make updates available to licensed customers.

The changes also cause the management to review their information because the format for financial statements change (AASB 105:139). More liabilities from the deferred revenue and assets from money received need more consideration (Bodle et al., 2016). The alteration in the financials will also cause a necessity for the training of the accounting personnel to be conversant with the new techniques. As leaders, the management should undergo the training and initialize programs and platforms to educate other supporting staff.

In conclusion, revenue recognition has different impacts on different industries because contractual agreements vary. The recognition is important since it allows for identifying contracts, having a performance obligation for products and services, determining prices for both contracts and products, and recognizing revenue when products meet their performance obligation. The information on the accounts also affects the company’s valuation, making the managers take responsibility and be accountable.

References

Bodle, K.A., Cybinski, P.J. and Monem, R. (2016), “Effect of IFRS adoption on financial reporting quality: Evidence from bankruptcy prediction“, Accounting Research Journal, 29(3), 292-312. Web.

Davern, M., Gyles, N., Potter, B. and Yang, V. (2019), “Implementing AASB 15 revenue from contracts with customers: the preparer perspective“, Accounting Research Journal, 32(1), 50-67. Web.

Knorová, K. (2016). Do Czech companies disclose revenue in accordance with IFRS requirements? European Financial and Accounting Journal, 11(3), 69-84. Web.

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BusinessEssay. "Revenue Recognition: Case Study of Harvard Business Publishing." July 24, 2022. https://business-essay.com/revenue-recognition-case-study-of-harvard-business-publishing/.