Corporate Learning's flagship product was an online resource brandedHarvard ManageMentor(or HMM). Wan explained that the product was "originally conceived as an on-demand performance support tool, where a manager who is about to take on a task, such as having a difficult conversation with an employee could go to HMM, look up that topic, go through about a 45-minute program that would provide some content and ideas, an exercise, and a practice conversation. So, it provided a real way for users to improve their ability to manage, particularly in some of the soft skills right before they had to do it."

By 2013, the latest version of HMM, HMM11, was approaching three million licensed users (seeExhibit 2for a sample page from the HMM11 learning tool). Client companies acquired a license to use the materials and could choose to either let HBP host the software or install it on their own system, in which case they were responsible for service. Users accessed the software on their desktop.

Wan explained: As the years went on . . . companies started using [HMM] as pre-work before a face- to-face training session. They would say "everybody complete this module on managing a team and then we'll do some role playing and follow-up face-to-face with an expert." In addition, the Corporate Learning support team was also increasingly asked to help clients map HMM modules to the competencies the companies have defined for various levels of management. Managers at these companies were required to complete these modules as part of their formal leadership development plan. So, HMM needed to become both a curriculum and course-like as well as a performance support tool. Our clients were also requesting more frequent updates to the modules as well as a greater variety of media formats beyond text - visuals, infographics, videos, interactive assessments, mobile friendly, etc. In addition, our product upgrade cycle of substantial revamps or new versions of HMM every 3 to 4 years made us more vulnerable to an intensifying competitive marketplace and emerging disruptors. As a result, we became very concerned about sustaining the high renewal rates of existing clients we had experienced as well as securing licenses for HMM from new clients.

In response to these factors, HBP decided to incorporate a number of substantial changes in the next version of HMM. Work on developing HMM12 began in 2012, with the release scheduled for September 2014. The new version of the product would aim to satisfy the curriculum driven and course-like approach that many clients were seeking while also providing flexibility to enable on- demand usage. In addition, the product would incorporate a variety of media formats beyond text to improve user engagement. Wan explained that "the folks on the team that architected the new version of HMM actually designed it in a way that all of the learning assets can be unbundled so that you can pull them out, mix them, and create a micro learning product of shorter bursts of learning."

An equally important challenge was addressing how the product could be updated more frequently to deliver "continuous value" to clients and thereby sustain renewal rates and respond more rapidly to competitive innovations. Even fixing bugs in the current version of HMM was cumbersome to implement given most clients hosted the software on their own servers. Therefore, HBP decided that the new version of HMM would be hosted exclusively by HBP as a cloud application software as a service (or SaaS). Wan explained, "we decided to become more like . . . Salesforce.com or a number of the other cloud type applications, enabling us to update the software and content continuously in response to changing market needs and competition."

Revenue Recognition for HMM

Early in the redesign of HMM12, Bills recognized that the decision for HBP to host the software would affect how revenues were recognized from sales of the new product. For HMM11, the client hosted the software on its servers and was responsible for all maintenance and operating costs. Although HBP offered to fix any software bugs, there was no contractual obligation to provide updates/point releases. As a result, the full value of any multi-year licensing contracts was recognized as revenue when the software was delivered.

If the client chose to have HMM11 software hosted on HBP's server, the contract specified that the client would pay HBP an upfront licensing fee and a separate hosting fee (equivalent to about 10% of the licensing fee) at the time the contract was signed. In the majority of contracts, the client paid a non-refundable licensing fee. Some clients negotiated a Termination for Convenience (TFC) clause. Since the underlying product was not updated and clients had the option of hosting the software on their systems or on HBP systems (incurring a separate hosting fee), HBP recorded the full value of the licensing fees as revenue at the beginning of the contract period. In contrast, hosting fees were recorded as deferred revenues and recognized as revenue ratably over the life of the contract (terms were 1, 2, or 3 years).

The new business model for HMM12 eliminated the option for clients to host HMM software and introduced an ongoing obligation for HBP. Clients would continue to pay an upfront licensing fee, but since only HBP could host the software there was no separate hosting fee. The license fee gave the client access to the software, the hosting, and any future improvement releases over the contract period. Accordingly, the contract was analogous to a subscription, rather than an outright sale.

For accounting purposes, HBP was required to record the upfront license fee as deferred revenue on its balance sheet. At the end of each accounting period, it would recognize a portion of the deferred revenue as earned revenue in the income statement. For example, if a client paid $360,000 for a 3-year (i.e., 36-month) license period, at the time of the contract HBP would record the $360,000 as deferred revenue (a liability) and cash (an asset) on the balance sheet. At the end of the first quarter (i.e., 3- months), HBP would recognize $30,000 (i.e., $360,000 divided by 36 months times 3 months) as earned revenue with a corresponding $30,000 subtracted from the deferred revenue liability.

question :

use the five-step model to compare revenue recognition between the two versions