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Customized Software stomized Software, a software company (the “Company”), is contracted by a bank (the *") to provide a customized online platform for the Bank’s mortgage loan applications (the Loan Platform’). Bank customers use the Loan Platform to complete online mortgage | | | applications, which involves inputting relevant information (e.g., name, address, employment, | income, assets) and uploading supporting documents (e.g., tax returns, bank statements). The | Loan Platform enables both the Bank and the applicants to retrieve necessary information and | documents as well as track the status of the lending process in real time. | To develop the Loan Platform, the Company significantly modifies and customizes its proprietary loan application software to work with the existing systems used by the Bank's . credit, customer service, and accounting departments. To create a Loan Platform that meets the ‘Bank's specifications, the Company is contractually required to perform the following specific software development activities (the “Software Services”): | e Conduct interviews with Bank personnel to understand system requirements and determine how to establish interfaces needed for the Bank to integrate the Loan Platform with its existing systems. e Test the Loan Platform inla test environment using dummy transactions. e Perform application program interface additions and modifications to the Loan Platform that are needed to support the Banks integration and data export requirements. e Add custom functionalities to the Loan Platform (e.g., Bank-specific underwriting and reporting features, integration with the Bank's customer service). e Customize the design of the Loan Platform (e.g., Bank’s logo, branding, color scheme, preferred button placement). Because the Loan Platform is highly customized, loan applicants perceive that they are accessing the Bank’s Web site and may be unaware of the Companys involvement. The Bank does not have the ability to direct the use of the Loan Platform during the Software Services period and is not allowed to run the Loan Platform on Bank hard oan Platform on its own servers, which allows dware at any time. Instead, after the Software Services are completed, the Company hosts t pan | the Bank and its loan applicants to access the software online (the “Processing Services”). Company has no obligation to perform further work on the Loan Platform (e.g., stomization, upgrades) after the Software Services are completed. Because the Loan Platform 1s on the Companys proprietary technology, no other vendor has the ability to perform the Joftware Services or Processing Services. The Loan Platform is delivered to the Bank as a ‘service in the form of the Processing Services. That is, no software license is transferred to the Copyright © 2020 Deloitte Development LLC ; All Rights Reserved EEE HE | | ELE Page 2 Case 7: Customized Software The Software Services commence on July 1, 20X1, and continue through December 31, 20X1. The Processing Services commence on January 1, 20X2, and continue for a term of five years. The contract requires the Bank to pay the Company nonrefundable fees of $3 million at the commencement of the Software Services (i.e., on July 1, 20X1) and $3 million over the period in which the Company will provide the Processing Services (1.e., equal monthly installments between January 1, 20X2, and December 31, 20X7). Neither party has a unilateral option to extend the contract, but the parties are free to negotiate an extension if desired. The Company concludes the following: e The provisions of FASB Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 6()6), and related amendments are effective for the Company. e The Company’s customer, as defined in FASB Accounting Standards Codification (ASC) | Subtopic 606-10, Revenue From Contracts With Customers — Overall, 1s the Bank os opposed to the mortgage loan applicants). Dhar wu ll ht fiihed por hhc tL elf of ae fee; ded Lf HA I ~ Thear angement is within the scope of ASC 606-10 and meets the criteria in ASC 606 i 10-2 Sto he considered a contract with a customer. cit or implicit promises other than the Software Services and the Processing : are immaterial | in the context of the contract and need not be considered. tal Saaciion price, as described in ASC 606-10-32-3, is the sum of the t1 ctually stated fees (1.e., $6 million). The Software Services are required to be performed to create the customized Loan ~ Platform that the Company will use to provide the Processing Services to the Bank. In other words, the Software Services are integral to the Bank's ability to derive its intended benefit from the Processing Services. The Bank does not derive value from the Software Services: rather, it derives value from the Processing Services. However, the Processing Services cannot begin until the Software Services are Sonpplete (1.e., until a Loan Platform that meets the Bank’s specifications has been developed). Required: 1. Do the Software Services constitute a performance obligation, as defined in ASC 606-10? | 2. How much revenue, if any, should the Company recognize through December 31, 20X12? l