Costs of software to be sold, leased, or marketed, asc 985. 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. The same is true for other substantial mixes that include intangible asset software and. The price at which the deliverable is regularly sold on a standalone basis.
To link to this page, paste this link in email, im or document. 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. Revenue recognition issues for software and high technology companies eitf 0021 accounting for revenue arrangements with multiple deliverables eitf 0021 applies to all deliverables within contractually binding arrangements in all industries except. 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. The 4 pillars of revenue recognition sop 972 and sab 104. Sop 97 2 has been modified by the issuance of sop 984, deferral of the effective date of a provision of sop 97 2, software revenue recognition and sop 989, modification of sop 97 2, software revenue recognition, with respect to certain transactions. The amendments in this update do not affect software revenue arrangements that do not include tangible products. Software revenue recognition under sop 972 by carmichael. The specter of revenue recognition erp software licensing. Revenue recognition for selling hardware plus software. New guidelines for software revenue recognition practical. Introduction the focus of part 2 of this article is on the practical steps that a lawyer should consider taking in preparing software agreements and the related policies and procedures to be considered by a software company in view of the new software revenue recognition guidelines, sop 972 the new sop. Nusbaum in this position, he is responsible for all accounting and auditing policies and.
Citeseerx document details isaac councill, lee giles, pradeep teregowda. Revenue recognition for software companies softrax. Revenue recognition accounting for software as a service. Sop 97 2 sets forth four criteria that must be met prior to recognizing revenue from an agreement, namely. Constructiontype and certain productiontype contracts aicpa. Remarks before the 2007 aicpa national conference on current. We hope that this second edition of software revenue recognition a roadmap to applying aicpa. Fasb financial accounting standards board 2,223 views. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. The accounting requirements within the standard have been modified by asu 2009 and asu 200914. Jan 21, 2016 consult sop 97 2 for further guidance. Modification of sop 97 2, software revenue recognition, with respect to certain transactions. Sop 911 stated that the accounting treatment of undelivered elements in a contract depended on the.
Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions. Do you agree with the task forces decision to modify the scope of sop 972 to address software enabled devices rather than to address broadly the measurement and separation criteria within sop 972. Inquiry as discussed in paragraph 3 of sop 972, software revenue recognition, in connection with the licensing of an existing product, a vendor might offer a small or insignificant discount on additional licenses of the licensed product or other products that exist at the time of the offer but. Software delivery should be straightforward and require. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. It applies to both public companies according to sab 104 and private enterprises. What follows is a summary of the current accounting guidance. When statement of position 972, software revenue recognition, was issued in october 1997, it was clear that all software companies would transition to this new standard. Acsec has issued sop 972, software revenue recognition, to replace sop 911 of the same name. It should be applied by all entities that earn such revenue. Nov 07, 2016 secs statement of postion sop 97 2, 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. In accounting practices, vendorspecific objective evidence vsoe is a method of revenue. For software companies, asc 606 brings change, guesswork. Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas software companies will have to get used to.
Software revenue recognition 5 recognised, even if all other revenue recognition criteria have been met and the lack of signature is due solely to administrative formalities extraneous to the negotiations between the parties. Revenue recognition issues for software and high technology. To link to the entire object, paste this link in email, im or document. Until then we have asc 985605 to guide us through software revenue recognition. Citeseerx aicpa statement of position 972, software. The latest chapter in that history is statement of position sop 97 2, software revenue recognition, issued by the aicpas accounting standards executive committee acsec in october 1997. There is much nuance in software revenue accounting which will be addressed in future posts. Multipledeliverable revenue arrangements a consensus of the fasb emerging issues task force, as further described below. Nusbaum in this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients. Sop 97 2 as amended which is put out by the american institute for certified public accountants aicpa available for purchase here is a set of guidelines for revenue recognition in software transactions. Introduction the focus of part 2 of this article is on the practical steps that a lawyer should consider taking in preparing software agreements and the related policies and procedures to be considered by a software company in view of the new software revenue recognition guidelines, sop 97 2 the new sop. The ultimate objective of attributing arrangement consideration is to determine when the arrangement consideration should be recognized as revenue. New standards update sop 972 software revenue recognition. One of the difficulties lies in determining whether or not 97 2 applies.
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. According to sop 972 software revenue recognition rules, firms need to establish vendor specific object evidence vsoe on each separate element of a contract. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. It specifies that revenue from an arrangement involving multiple elements should be. 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. The guidance of sop 97 2 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. Abstract the american institute of certified public accountants has issued sop 911, a standard which delineates acceptable practice in the recognition of revenue obtained from computer software. What was not clear was how bright lines would blur for companies outside of the traditional software sector as technology evolved over the next decade. Adjustments to sop 97 2 software revenue recognition. The right way to recognize revenue learn the components of sab 101 and mistakes to look out for. This publication includes the appropriate references from the asc. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable. In october 1997, the aicpa issued statement of position sop 97 2, entitled software revenue recognition. Determining how and when to recognize revenue for software licensing arrangements continues to be challenging even though it has been more than a decade since the accounting standards executive committee acsec of the american institute of certified public accountants aicpa issued statement of position 97 2, software revenue recognition.
Aicpa statement of position 989, modification of sop 97 2, software revenue recognition, with respect to certain transactions paragraphs 68. Sop 972, software revenue recognition, provides guidance on when revenue should. Indeed, prior to sop 972, many software companies recognized revenues on their contracts by using a criticalevent approach. The right way to recognize revenue journal of accountancy. Dec 10, 2007 revenue recognition for hardware deliverables in software arrangements. Jul 25, 2017 software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. This guidance is codified in asc 985605, software revenue recognition. The current gaap standards for cloud and saas software companies, sop 972 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for revenue recognition. Revenue recognition accounting for software as a service saas. Software revenue recognition under sop 972 the cpa journal. Jun 03, 2015 the 4 pillars of revenue recognition sop 972 and sab 104. Sop 972 is the accounting standard that requires apple to. Before sop 972 was issued, us gaap rules on software.
Following the issuance of sop 97 2, the aicpa also released numerous standards and t echnical. Since the issuance of sop 911, practice issues had been identified that acsec believed had not been addressed adequately in the technical literature. Accordingly, the total amount of revenue was recognized upon delivery of the. Executive summary statement of position sop 97 2 provides guidance on applying gaap in recognizing revenue from software and software related transactions. The issue is whether non software deliverables included in an arrangement that contains software that is more than incidental to the products or services as a whole are included within the scope of sop 97 2. Modification of sop 972, software revenue recognition, with.
Software revenue recognition under sop 972 by douglas r. Software revenue recognition rules and postcontract. As evidence that change is the only constant, sop 97 2 software revenue recognition has subsequently been modified again to adjust for changing business conditions. The guidance in asc 985605 is applicable to transactions involving the licensing, selling, leasing or otherwise marketing of computer software and related elements. The new sop provides for prospective application of its guidelines for transactions entered into in fiscal years beginning after december 15, 1997. The subject of revenue recognition is dry stuff, but youll be helping your company and yourself if you are aware of some of the general rules relating to the accounting for revenue for software contracts contained in sop 972. Lpi software funding group leaders in the software. Statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and softwarerelated transactions. We have prepared this publication to help you understand and apply the software revenue recognition. Revenue recognition literature sop 972 and 989 sab 101 and 104 tpas aicpa technical practice aids. Feb 07, 2017 the current gaap standards for cloud and saas software companies, sop 97 2 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for revenue recognition. Out of the box software this is prepackaged software that is sold to customers without any modifications. Charlie will begin with a description and examples of the use of the four criteria pillars and how software and hardware currently have different rules.
Arrangements involving multiple deliverables or a deliverables. Renowned revenue recognition expert, tony sondhi, discusses the critical issues and implementation challenges facing companies as they prepare to adopt these new standards. 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 primary authority for software revenue recognition is aicpa statement of position sop no. Revenue recognition for software companies softrax industry. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is. Sop 972 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Constructiontype and certain productiontype contracts aicpa statement of position 97 2, software revenue recognition 2008. Aicpa statement of position 984, deferral of the effective date of a provision of sop 972, software revenue recognition aicpa statement of position 989, modification of sop 972, software revenue recognition, with respect to certain transactions fasb emerging issues task force 003, application of aicpa statement of position 972 to. Sop 972 governs how any company that licenses, sells, leases or otherwise markets software unless its incidental to the product or service as a whole must recognize the revenue. Citeseerx constructiontype and certain productiontype. Examples include companies in the medical device, and telecommunications industries.
Issued in october 1997, aicpa statement of position sop 972, software revenue recognition, provides detailed guidance on accounting for revenue associated with software and software related arrangements. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. Revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. For software companies, asc 606 brings change, guesswork bi101. The statement splits software sales into two different categories.
This approach is intended to avoid accounting practices that might result in revenue being recognised too early. Since the issuance of sop 97 2, us standard setters released a wide range of guidance over 50 publications in all. While sop 97 2 1 is fairly comprehensive, it obviously does not provide specific guidance for every software arrangement. Part 2 renowned revenue recognition expert tony sondhi discusses the critical issues and implementation challenges facing companies as they prepare to adopt these new standards. The guidelines, entitled statement of position 972, software revenue recognition, described in this article as the new sop supersedes statement of position 911 sop 911 on the same subject. These rules have ramifications to your companys financial well being, as well as for the timely booking and.
Software the primary authority for software revenue recognition is aicpa statement of position sop no. A comprehensive guide software revenue recognition. At the time of its issuance, sop 972 primarily applied to companies that sold software. Software revenue recognition on the rise journal of accountancy. In issuing these sops, acsec determined that the same basic criteria for revenue recognition should apply to software arrangements as applied to. Issued by the accounting standards executive committee acsec, sop 97 2 provides guidance on applying revenue recognition principles to software transactions. Nevertheless, revenue and profit recognition changes can. Key impacts of recent changes to revenue recognition standards. Accountants aicpa statement of position 972 sop 972 and sop 989 the residual method. Sop 972 makes clear that delivery has not occurred unless the software is shipped to the customers place of business or another site specified by the customer. Statement of position 972 continues to help financial. Software revenue recognition aicpa sop 972 software revenue recognition. Vendor specific objective evidence vsoe, as defined in sop 972, software revenue recognition, is the best evidence of fair value.
If the hardware does not function without the license subscription, then ratable revenue recognition is required of. American institute of certified public accountants. Essentially, vsoe is the selling price the market is willing to pay for a particular good or. In october 1997, it issued a statement of position sop 972, software revenue recognition. The changing requirements of sop 972 software revenue recognition. Vsoe focuses on the fair market value of an item sold individually, as opposed to the assigned sales value of the item sold as part of a multipleelement bundle.
S tatement of position 97 2, software revenue recognition sop 97 2, the first industry specific gaap guidance on revenue recognition for software and software related products. Under sop 972, recognition of revenue generally occurs at delivery if a fourpart conjunctive test is met. To embed the entire object, paste this html in website. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the impact of the new standard to revenue arrangements common. That may shift was the deliberation process continues. Sop 911 states that revenue can be recognized only after the delivery of the software to a customer. 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. It is important for companies to regularly assess whether or not 972 applies, especially. Vsoe revenue recognition is commonly used by companies that sell software products and services in multipleelement bundles.
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