Background

The adoption date of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), was effective for public and private entities as of January 1, 2018 and January 1, 2019, respectively.  The new guidance introduces concepts such as performance obligations and significant finance components, which affects revenue recognition of professional service organizations.

One of our clients, an industry leader in programmatic advertising management platforms, was planning its implementation of ASC 606.  As a result of discussions with its auditors, company management determined that they would need to calculate the fair value split between four product line licenses and their respective maintenance contracts.  Company management had all of the inputs for these calculations, with the exception of the estimated useful lives of the four product lines.

Analysis and Recommendations

Company management contacted Teknos seeking advice on the possible creation of a model used to estimate product lives going forward.  Teknos utilized a combination of industry standard practices  and internally developed methodologies in estimating the useful life of an asset.  These practices assert that an asset’s life can be estimated by measuring the number of years in which its cumulative projected discounted cash flows reach approximately 80-90% of its total discounted cash flows.

Results

Teknos developed a streamlined model for calculating the lives of the four product lines and provided the model to the client within two weeks of receiving the initially requested data.  The CFO was extremely pleased with the result and received acceptance from their audit team to use the model for other possible product lines in the future.

Teknos Associates provides valuation and advisory services for emerging growth companies and their venture capital backers. Clients rely on our financial expertise, knowledge of technology markets, and high standards to deliver relevant and timely valuation reports, opinions, and analyses.