Naramata Software Corp.

(Naramata) is a public company that provides software solutions to commercial customers around the world. Naramata has long been very popular among investors because it has consistently reported steadily growing income quarter after quarter. In addition to providing customer-designed software products it also sells a range of “offthe-

shelf” products. Usually, with the purchase a software package a customer receives 18 months of technical support, online or by phone. In addition, Naramata promises to provide customers with free upgrades for any software they purchase for up to three years from the date of purchase. Naramata’s CFO has been thinking about how the company recognizes its revenue from the sale of these off-the-shelf packages. He thinks the company is really selling three products (the package itself, the technical support, and free upgrades) not one and, accordingly, should recognize the revenue in three chunks. For example, if the customer pays $1,000 for a software package Naramata would recognize $750 immediately for the software, recognize $100 over 18 months for the technical support, and recognize $150 when upgrades become available.

Required:
What do you think of the CFO’s proposal for recognizing revenue? Use the revenue recognition criteria to defend your answer. What do you think the CFO’s motivation for proposing this new approach might be?