I don't know if it's a best practice or not, but we created a custom resource association called "Software Update" then created new assets for the versions and associate them to the older version.  That way we can see what we've paid for the app over the life of it vs when we've bought it new.

The answer to your question is as follows:  When you upgrade, you enter your upgrade purchase as a Software Purchase and then select under "Upgraded License Contract" the software contract you are upgrading.   On the software license reporting, it will show as negative the quantity you upgraded under the Upgraded License Contract.   

You then go into the contract for the version you have upgraded to and select the upgraded purchase as a purchase.    It will then include that count in the "Purchased" count for the new version.

Now the downside:  Unfortunately, if you are upgrading a suite that includes multiple software contracts (Say Adobe CS4  Master Collection)  It is unfortunately not possible to select multiple contracts to be included as part of the upgraded suite.   Currently you have to set it up as if you are upgrading one component at a time. 

 We currently have over 3000 software contracts and are coming up against some of these limitations every day.   It looks like they are planning to do a major upgrade of this product in Version 7 - much needed.  In the meantime, I'm working with the product manager to pass along as many suggestions as possible so it will be as robust as it needs to be to truly handle the task at hand like it should. 

Ted.Hewson@tuhs.temple.edu