You are beginning the 2015 annual audit of your client L&H. This is your second year on the audit team. L&H is a software company that develops speech recognition software (think Apple Siri) and engages in complex software licensing and development arrangements. Their main business is developing speech recognition software applications and then licensing the software to their customers. You notice that they have recorded an asset of $1.5 million for a software license they acquired from a customer, Born Software. 

You inquire about this asset and the CEO tells you that L&H will use the software in their own internal software development projects so they have capitalized the expense and will amortize it over its useful life of 7 years. You are also told that Born is a customer of L&H as they had purchased a software license from L&H for $1.5 million just over a year ago. You are told that Born intends to imbed speech recognition functionality into the software they are developing. 

As Born had not paid for the software license at the time they entered into the second arrangement, both parties agreed that they would swap checks to make it simple. Born would pay L&H $1.5 million for the L&H license and L&H would pay Born $1.5 million for the Born license, all at the same time. The CEO tells you he will answer any questions you have and provide whatever documentation you would need in order to support the accounting for this transaction. He assures you that Born is an independent company and is not a related party to L&H. The following is a summary of the accounting by L&H:

Entry in 2014 to record sale of license:

Debi

tCreditAccounts receivable$1.5mRevenue$1.5m

Entry in 2015 to record purchase of license and swap of checks:

Software license (asset) $1.5m

Cash$1.5m

Accounts receivable$1.5m

Cash$1.5m

You have never seen a transaction like this so you decide to first consider the FASB Concept Statements as you try to figure out how to approach researching this. You vaguely remember talking about this in your MSA class so you pull out your old notes which you have carefully stored and find the slides on definition of assets and revenue recognition. This is where you will start. Document your thought process in your journal with specific references to the Concept Statements. In addition discuss what accounting guidance you would consider next as you work through this accounting. Be specific as to the GAAP codification references. 

Discuss any concerns you may have about the accounting. Submit your analysis as your assignment in Canvas. I encourage you to work in groups to discuss the issues and possible answers, however I would like you to prepare your analysis individually.