If a multipleelement software arrangement includes explicit or implicit rights to pcs, pcs is a separate element of the arrangement. Software revenue recognition rules and postcontract. For example, a software license is separable from pcs under current us gaap only if the entity has vsoe for. 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. Typically, software companies must establish vsoe for pcs and training services since these elements are delivered over a period of time and are an undelivered element at the. A roadmap to applying asc 985605 2101 vsoe of fair value for a pcs renewal rate that changes on the basis of an inflation index 97 2102 no vsoe of fair. Revenue recognition for software companies softrax.
During a tensoft webcast entitled revenue recognition accounting for software as a service saas, guest presenter jeffrey werner was asked the following question how are you seeing. In this example, the new standard will accelerate the recognition of revenue if vsoe of fair value was not previously established. Vendorspecific objective evidence vsoe vsoe of fair value is no longer required to identify the unit of accounting. Software accounting policy and practice series explains and analyzes revenue. Vsoe of fair value for pcs over a deployment period part. Recent developments in revenue recognition brian kreischer tim perotti december 14, 2010. Nonetheless, under the new revenue recognition rules, vizzy would separate the license and pcs deliverables even though vizzy does not have vsoe for the. Software revenue recognition may change under asc 606, especially. Revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. I am not sure whether analysis plays a big part to your question, but i can explain why vsoe is used in the software industry and what you should manipulate as one goes. Today, software developers are permitted to use a residual method when there is vsoe of the fair value of undelivered elements such as pcs. Deferral of revenue recognition if payment terms extend more than 12 months. The updated standard uses a different process to allocate the contract value and related discounts with the contract by eliminating.
As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. Also, sop 972 would apply the essentialtothefunctionality. Per the current software accounting rules under asc topic 985, software. In addition, the renewal rate written into the contract can be used as the vsoe selling price, provided it complies with all the other revenue recognition rules. The primary authority for software revenue recognition is aicpa statement of. If your firm has to be compliant with sop 972 software revenue recognition rules, then pricing matters a lot. Implementing the new revenue guidance in the technology. Challenges ahead for software and saas companies with asc 606. New revenue recognition rules for technology moss adams. New revenue guidance implementation in the software industry. Contracts that were previously split between two components, usually software license and pcs, may now be split into even more performance obligations.
Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and softwarerelated transactions. Revenue recognition within the software industry has historically been highly complex with much. If no vsoe could be obtained, psc was combined with the contract. We note in your response to prior comment 6 that the fair value of the nonessential software pcs is established using vsoe under the software revenue recognition rules. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and software related transactions. Software license arrangements can be organized as a hosting arrangement, saas, a hybrid of both hosting and saas, or direct delivery to the customerall of which have. Bloomberg tax portfolio 51032nd, starczewski, fritz, and rowe, revenue recognition.
Understanding the new revenue recognition standard intacct. Its the leading cause of revenue restatements, a destroyer of stock market listings, accountings equivalent of quantum mechanics and string theory. Revenue recognition model 8,27 royalties 58,67 shipping and handling costs and fees 87 software industry key impact areas 11,12 revenue recognition issues 5356 solar industry. Software companies will no longer need to establish vsoe in order to recognize revenue separately for different components of a contract. Everything you need to know about vsoe but are afraid to ask paul lamparski finance director, global revenues. Assuming that after the revenue allocation is performed according to sop 972 where vendorspecific objective evidence vsoe. Vsoe calculation using the bell curve approach bi101. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos. Revenue recognition for software companies softrax industry.
Learn how fasbs new revenue recognition guidance will affect software as a service. Although the residual method is still technically permitted under the new revenue rules, its use will be far more limited and less common. Separate rules for software sop 972 and vsoe of fair value. Abc concludes that this range is not sufficiently narrow to establish vsoe of fair value for the pcs under the stated renewal approach. Macintosh computers, under software revenue recognition accounting, deferring the. A world without softwarespecific revenue guidance and without vsoe the new revenue standard was issued in 2014, and the 2018 and 2019 application date once seemed like a long way off. Gaap, software organizations must demonstrate vendorspecific objective evidence vsoe of the fair value for each undelivered element a high hurdle. In a nonpcs arrangement, such as training of customer staff in the use of the software, separate revenue recognition applies only if 1 vsoe see above of fair value exists.
Vsoe typically exists when a product or service included in the contract is sold separately. Pcs within and outside the scope of asc 985 605 no vsoe. It is only through tracking the sales price of a product or service over. Under sop 972, vsoe of fair value must be established for the nonsoftware deliverables to avoid deferring revenue recognition. In this paper, the pricewaterhousecoopers pwc global software practice examined certain situations in which. Accounting for an arrangement in which the undelivered elements are pcs and services and. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. Pcs is not usually sold alone accept when the service is renewed. Never within the minutiae of the sop does the securities and exchange committee define a single method for establishing vsoe. I think though just as a reminder, sometimes there are business decisions that get made and it is not always wrong. Under asc 606, arcad treats each distinct element of pcs as a separate performance obligation, resulting in more performance obligations. Assuming vsoe is obtained and pcs is separable, arcad would recognize revenue on a straightline basis over time. Some industry experts say that implementing fasbs new revenue recognition guidance, asc 606, will be more difficult for software as a service saas and software companies than sarbanes.
When term software license arrangements are bundled with pcs, software entities generally cannot establish vsoe for pcs, because the pcs is never sold separately from the. Pcs within and outside the scope of asc 985 605 no vsoe for pcs on january 1 from acc 660 at devry university, chicago ohare. In our example, there is no vsoe since software and pcs are not sold separately. Luckily, gaap software revenue recognition rules have accepted the renewal rate as evidence of vsoe. Revenue recognition rules leveling the playing field.