Overview of effects of vsoe of fair value on revenue recognition. The updated standard uses a different process to allocate the contract value and related discounts with the contract by eliminating the need to establish vendorspecific objective evidence vsoe, which may produce more aggressive revenue recognition. Key impacts of recent changes to revenue recognition. Revenue recognition issues for software and high technology companies.
Under sop 97 2, vsoe of fair value must be established for the nonsoftware deliverables to avoid deferring revenue recognition. Vsoe calculation using the bell curve approach bi101. Sop 97 2, software revenue recognition, provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software. In this paper, the pricewaterhousecoopers pwc global software practice examined certain situations in which adopting ifrs may require a reconsideration of revenue recognition policies and practices that were driven by us gaap compliance. Key impacts of recent changes to revenue recognition standards what you need to know as a software company in june of 2014, the financial accounting standards board, together with the international accounting standards board, issued a new revenue recognition standard that replaces all current industryspecific revenue recognition rules. Jul 11, 2007 all of the revenue recognition requirements in sop 97 2, including vsoe of fair value for all undelivered elements and the refund, or other concession, must be met in order to recognize revenue upon delivery for the portion of the fee allocated to the software element. Since the issuance of sop 911, practice issues had been. Accountants aicpa statement of position 972 sop 972 and sop 989 the residual method. Revenue recognition for hardware deliverables in software arrangements. Accountants and auditors require socalled vendorspecific objective evidence vsoe of the fair value of the contracts components so that it can properly determine the value of individual items and recognize partial revenue before the entire contract is fulfilled. The fasb and the iasb are working on a converged model for customer contracts that will completely revamp the revenue recognition rules. Intacct revenue management also aids compliance with aicpas statements of position sop 811, 972, and 989, sec staff accounting bulletins sab 101 and 104 and eitf 0021, 0801 and 0903. Under eitf 0021, companies were not allowed to recognize revenue for separate.
It is unclear whether the nonsoftware deliverables fall under the scope of sop 97 2 or eitf 0021. Renowned revenue recognition expert, tony sondhi, discusses the critical issues and implementation. Remarks before the 2007 aicpa national conference on current. Sop 97 2 is even more restrictive than the current multiple deliverable revenue recognition standard because each element in a software arrangement requires vsoe. Introduction to werner consulting group revenue recognition services include. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. Move deferred revenue off spreadsheets and into your core accounting workflows. The portfolio includes an extensive analysis of the applicability and application of american institute of certified public accountants aicpa statement of position no. Sop 972, software revenue recognition, as codified in asc topic 985, to software. Turner when sab 101 was first issued, many questioned whether the staff was actually changing the existing rules related to revenue recognition, or whether.
Revenue recognition for software companies softrax. Sop 972, software revenue recognition, provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer. Consequently, sop 972 stipulates that vsoe can only exist if the element in. Jan 01, 2008 at issue was the companys approach to a onetwo regulatory punch. Unraveling the new revenue recognition rules frank. Sop 972 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. Everything you need to know about vsoe but are afraid to ask paul lamparski finance director, global revenues.
New revenue recognition standard means big changes for. Separation and allocation criteria of sop 972 when an arrangement includes multiple elements within the scope of 972, the sop requires that vendorspecific objective evidence vsoe. Dec 14, 2010 internet traffic, while the software analyzes the filtered traffic to provide realtime security information. You can use the vsoe feature to determine vsoe prices of items and defer the recognition of this revenue. Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions. A performance obligation is a promise in a contract with a customer. The information technology, mobile and electronic device company announced in september that it was unable to complete the analysis necessary under sop 972 to provide vendor specific objective evidence vsoe to support recognition of revenue from certain types of software. Software companies are no longer required to obtain.
While its a draft rule at this point, it should receive final approval in the next several. Under sop 972, recognition of revenue generally occurs at delivery if a fourpart. Sop 97 2 vsoe for allocation same relative or residual method of allocation same revenue allocation refers to the allocation of the total contract amount into each of the elements that can be separately recognized when all the revenue recognition criteria are met. This means that a bona fide contract needs to exist see part 4, legal rules. Create a foundation for robust internal controls over revenue processes. What kind of disruptions have the new revenue recognition. The vsoe feature is intended for use by united states companies to maintain gaap compliance with the american institute of certified public accountants aicpa statement of position 972 sop 972 and sop 989 the residual method. Dec 10, 2007 revenue recognition for hardware deliverables in software arrangements. Sop 972 superseded sop 911, also entitled software revenue recognition. Never within the minutiae of the sop does the securities and exchange committee define a single method for establishing vsoe.
It also highlights the most important provisions of gaap related to software revenue recognition. Fair value evidence is either entityspecific or vsoe. Previously under eitf 00 21 revenue recognition required. According to sop 972 software revenue recognition, the price must be fair value as established by the market. Revenue recognition rules leveling the playing field 1. As we noted previously, sop 972 software revenue recognition defines vsoe of fair value as the price charged when the same element is sold separately.
Support compliance with revenue recognition rules sop 972, 989, vsoe, sop 811, sab 101, and eitf 0021. Michael rewkiewicz, senior manager assurance and advisory services. A publication of the american institute of certified public. Under sop 972, if vsoe does not exist to support the fair value of each element, all revenue from the arrangement must be deferred. Revenue recognition for software companies softrax industry. Asu 200914 formerly known as eitf 093 tackles a hotly debated item.
Companies that ignore the accounting rules could find themselves restating their. The same basic revenue recognition rules, such as sec staff accounting bulletin no. Sop 972 governs how any company that licenses, sells, leases or otherwise. Sop 972, which governs how companies that sell software recognize the revenue. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 97 2, sab 104, and eitf 0021. Aicpa statement of position 972, software revenue recognition sop 972 sec staff accounting bulletin no.
Support compliance with revenue recognition rules sop 97 2, 989, vsoe, sop 811, sab 101, sec speech. Do you use softrax revenue manager revenue recognition for erp. Do the vsoe rules of sop 972 as discussed in paragraph 10 apply to. Deferred revenue can be a substantial issue for companies that sell bundled products and services under a single contract. Accelerating revenue recognition to the speed of business. Sop 972 to provide vendor specific objective evidence vsoe to. New revenue recognition standard means big changes for software companies 3222016 the financial accounting standards boards fasb new principlesbased rules on revenue recognition will significantly change the way your software company determines when and how to recognize revenue. Support compliance with revenue recognition rules sop 97 2, 989, vsoe, sop 811, sab 101, and eitf 0021. It specifies that revenue from an arrangement involving multiple elements should be. Also, sop 97 2 would apply the essentialtothefunctionality criterion to nonsoftware deliverables. Separate rules for software sop 972 and vsoe of fair value most software revenue comes from license fees, and historically that revenue was recognized as soon as the product was delivered to the customer assuming the other three tests were also met. Separate rules for software sop 972 and vsoe of fair value most software revenue comes from license fees, and historically that revenue was recognized as soon as the product was. Better establish and enforce internal controls for revenue.
Pursuant to the modification of sop 97 2 in aicpa statement of position sop no. At issue was the companys approach to a onetwo regulatory punch. Nov 30, 2009 unraveling the new revenue recognition rules. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. In this quick session we cant possibly address all of the literature, but i am going to begin with a brief discussion of the applicability of sop 972.
Jul 05, 20 if your firm has to be compliant with sop 97 2 software revenue recognition rules, then pricing matters a lot. To show proof of vsoe, firms needed to collect sales transactions for each. One of the critical concepts established by sop 97 2 is vendor specific objective evidence vsoe. Vendorspecific objective evidence how is vendorspecific. Pursuant to the modification of sop 972 in aicpa statement of position sop no. Revenue recognition on software arrangements appendix c of sop 972. In this paper, the pricewaterhousecoopers pwc global software practice examined certain situations in which adopting ifrs may require a reconsideration of revenue recognition. The fasb and the iasb are working on a converged model for customer contracts that will completely revamp the revenue recognition rules and replace much of the guidance currently in place. The same basic revenue recognition rules, such as sec. While sop 972 1 is fairly comprehensive, it obviously does not provide specific guidance for every software arrangement. Apr 18, 2011 you could make a case that sales and marketing creativity driven by the need to win business helped drive the need for these standards. The vsoe feature is intended for use by united states.
In recent months, the emerging issues task force eitf has passed two new changes that modify how certain revenue will be recognized. Softrax revenue manager revenue recognition for erp 2020. Sop 97 2 software revenue recognition also addressed the idea of recognizing revenue when software and hardware components operated in conjunction with each other. New eitf revenue recognition standards for multiple. The software and the hardware function together to deliver the essential functionality of the product. In accounting practices, vendorspecific objective evidence vsoe is a method of revenue recognition allowed by us gaap that enables companies to recognize revenue on specific items on a multiitem sale based on evidence specific to a company that the product has been delivered. Vsoe revenue recognition is commonly used by companies that sell software products and services in multipleelement bundles. To show proof of vsoe, firms needed to collect sales transactions for each separate element of a contract and determine the average price for these transactions. Key features automate revenue recognition in compliance with aicpas statements of position sop 811, 972, and 989. It should be applied by all entities that earn such revenue. The new rules separated the software elements from the hardware elements and changed vsoe requirements. Assuming that after the revenue allocation is performed according to sop 972 where vendorspecific objective evidence vsoe. New standards update sop 972 software revenue recognition.
If a company is unable to assert that it possesses vsoe for each element in a multipleelement arrangement, the. Vendor specific objective evidence vsoe upland software. The guidance in that sentence would have led to unduly conservative patterns of revenue recognition. Key impacts of recent changes to revenue recognition standards. Revenue recognition accounting for software as a service saas. Provide a transactional audit trail for sox 404 assertions. One of the difficulties lies in determining whether or not 972 applies. In this quick session we cant possibly address all of the literature, but i am going to begin with a brief discussion of the applicability of sop 97 2. Key differences between asc 60535 formerly sop 811. Have you considered it as part of your software evaluation process. The information technology, mobile and electronic device company announced in september that it was unable to complete the analysis necessary under sop 972 to provide vendor specific objective evidence vsoe to support recognition of revenue from certain types of software and maintenance and support services provided as part of multipleelement contracts. Jul 27, 2008 where vsoe does not exist, all revenue recognition is deferred until the earlier of the existence of vsoe or the delivery of all of the elements in the multipleelement arrangement. Additionally, while some argue that sop 972 is too rules. Sop 972, software revenue recognition, provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing or otherwise marketing computer software.
By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. Nusbaum is a partner and national director of accounting and auditing for grant thornton llp. In this quick session we cant possibly address all of the literature, but i am going to begin with a brief discussion of the. Sop 972, software revenue recognition, provides guidance on. Apr 23, 2020 pursuant to the modification of sop 97 2 in aicpa statement of position sop no. Frequently, this leads firms to defer revenue until the entire contract was complete because vsoe had not been established. For these types of arrangements, revenue recognition remains under the guidance of sop 972. It is only through tracking the sales price of a product or service over time that a firm can develop vendor specific objective evidence of fair value, also known as vsoe. As a result, if a taxpayers recognition of advance payments in year 1 is consistent with current accounting standards eitf issue no.
One of the difficulties lies in determining whether or not 97 2 applies. While sop 97 2 1 is fairly comprehensive, it obviously does not provide specific guidance for every software arrangement. Company sells operating system software and related pcs and. Planning for new revenue recognition standards governance. Sop 972 specifies that revenue from an arrangement involving multiple elements should be allocated to the various elements based on vsoe of fair values. In accounting practices, vendorspecific objective evidence vsoe is a method of revenue.
Additionally, while some argue that sop 97 2 is too rules based, i believe that there are certain principles that can be applied and that the standard. Separate rules for software sop 972 and vsoe of fair value. But by the time software was widely entrenched for. Appendix a of sop 972 104 response to comments received appendix b of sop 972 109 revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. In june of 2014, the financial accounting standards board, together with the international accounting standards board, issued a new revenue recognition standard that replaces all current industryspecific revenue recognition rules with a single principlebased model.
Companies that ignore the accounting rules could find themselves restating their earningsand facing lawsuits and plummeting stock prices. Secs statement of postion sop 972, software revenue recognition and sop 989, software revenue recognition with respect to certain transactions, applied to all entities that license, sell, lease or market computer software. Vsoe, as defined in sop 972, software revenue recognition, is the best evidence of fair value. Banking, finance and accounting business law computer software industry accounting and auditing industry sales and revenue marketing software industry. Formerly aicpa statement of position 972, software revenue recognition.
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