Arrangements involving multiple deliverables or a deliverables. Revenue recognition literature sop 972 and 989 sab 101 and 104 tpas aicpa technical practice aids. Examples include companies in the medical device, and telecommunications industries. The price at which the deliverable is regularly sold on a standalone basis. Software the primary authority for software revenue recognition is aicpa statement of position sop no. 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 for selling hardware plus software. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. Sop 911 states that revenue can be recognized only after the delivery of the software to a customer. 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. In accounting practices, vendorspecific objective evidence vsoe is a method of revenue.
That may shift was the deliberation process continues. 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. 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. 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. At the time of its issuance, sop 972 primarily applied to companies that sold software. 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. Software revenue recognition aicpa sop 972 software revenue recognition. We have prepared this publication to help you understand and apply the software revenue recognition. Sop 97 2 sets forth four criteria that must be met prior to recognizing revenue from an agreement, namely. This approach is intended to avoid accounting practices that might result in revenue being recognised too early.
Software revenue recognition under sop 972 by douglas r. The guidance of sop 97 2 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. The statement splits software sales into two different categories. Software delivery should be straightforward and require. Accountants aicpa statement of position 972 sop 972 and sop 989 the residual method.
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. 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. 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. Until then we have asc 985605 to guide us through software revenue recognition. Vendor specific objective evidence vsoe, as defined in sop 972, software revenue recognition, is the best evidence of fair value. Software revenue recognition rules and postcontract.
Following the issuance of sop 97 2, the aicpa also released numerous standards and t echnical. Jul 25, 2017 software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Revenue recognition accounting for software as a service saas. If the hardware does not function without the license subscription, then ratable revenue recognition is required of. Essentially, vsoe is the selling price the market is willing to pay for a particular good or. Since the issuance of sop 911, practice issues had been identified that acsec believed had not been addressed adequately in the technical literature. Software revenue recognition on the rise journal of accountancy. The new sop provides for prospective application of its guidelines for transactions entered into in fiscal years beginning after december 15, 1997.
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. As set forth in concepts statement 5, paragraph 83, recognition involves consideration of two factors, a being realized or realizable and b. Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions. The right way to recognize revenue journal of accountancy. While sop 97 2 1 is fairly comprehensive, it obviously does not provide specific guidance for every software arrangement.
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. Software revenue recognition under sop 972 by carmichael. To link to the entire object, paste this link in email, im or document. Executive summary statement of position sop 97 2 provides guidance on applying gaap in recognizing revenue from software and software related transactions. It specifies that revenue from an arrangement involving multiple elements should be. Sop 972, software revenue recognition, provides guidance on when revenue should.
Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Modification of sop 972, software revenue recognition, with. 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. The guidance in asc 985605 is applicable to transactions involving the licensing, selling, leasing or otherwise marketing of computer software and related elements. To embed the entire object, paste this html in website. American institute of certified public accountants. 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. Nevertheless, revenue and profit recognition changes can. Key impacts of recent changes to revenue recognition standards. The same is true for other substantial mixes that include intangible asset software and. Jun 03, 2015 the 4 pillars of revenue recognition sop 972 and sab 104.
Accordingly, the total amount of revenue was recognized upon delivery of the. Constructiontype and certain productiontype contracts aicpa statement of position 97 2, software revenue recognition 2008. Citeseerx document details isaac councill, lee giles, pradeep teregowda. 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. 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. According to sop 972 software revenue recognition rules, firms need to establish vendor specific object evidence vsoe on each separate element of a contract. In october 1997, it issued a statement of position sop 972, software revenue recognition. Lpi software funding group leaders in the software.
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. New standards update sop 972 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. Nusbaum in this position, he is responsible for all accounting and auditing policies and. It should be applied by all entities that earn such revenue. 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. Revenue recognition for software companies softrax. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable.
The ultimate objective of attributing arrangement consideration is to determine when the arrangement consideration should be recognized as revenue. Revenue recognition for software companies softrax industry. 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. Dec 10, 2007 revenue recognition for hardware deliverables in software arrangements. The accounting requirements within the standard have been modified by asu 2009 and asu 200914. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. 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. 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. 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. The right way to recognize revenue learn the components of sab 101 and mistakes to look out for. Jan 21, 2016 consult sop 97 2 for further guidance. Out of the box software this is prepackaged software that is sold to customers without any modifications. 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.
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. To link to this page, paste this link in email, im or document. If the hardware does not function without the license subscription, then ratable revenue recognition is required of both the hardware and subscription. One of the difficulties lies in determining whether or not 97 2 applies.
For software companies, asc 606 brings change, guesswork bi101. For software companies, asc 606 brings change, guesswork. 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. 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. Statement of position 972 continues to help financial. It is important for companies to regularly assess whether or not 972 applies, especially. 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. This publication includes the appropriate references from the asc. The amendments in this update do not affect software revenue arrangements that do not include tangible products. 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 primary authority for software revenue recognition is aicpa statement of position sop no. 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. Nusbaum in this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients.
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. Adjustments to sop 97 2 software revenue recognition. These rules have ramifications to your companys financial well being, as well as for the timely booking and. 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. Vsoe revenue recognition is commonly used by companies that sell software products and services in multipleelement bundles. In issuing these sops, acsec determined that the same basic criteria for revenue recognition should apply to software arrangements as applied to sales of other products. 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. New guidelines for software revenue recognition practical. Sop 972 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic.
The changing requirements of sop 972 software revenue recognition. Sop 911 stated that the accounting treatment of undelivered elements in a contract depended on the. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. 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. Issued by the accounting standards executive committee acsec, sop 97 2 provides guidance on applying revenue recognition principles to software transactions. Since the issuance of sop 97 2, us standard setters released a wide range of guidance over 50 publications in all.
Revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. Revenue recognition accounting for software as a service. 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. Citeseerx aicpa statement of position 972, software. 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. Statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and softwarerelated transactions. Revenue recognition issues for software and high technology. Aicpa statement of position 989, modification of sop 97 2, software revenue recognition, with respect to certain transactions paragraphs 68. We hope that this second edition of software revenue recognition a roadmap to applying aicpa. 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.
Before sop 972 was issued, us gaap rules on software. 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. Fasb financial accounting standards board 2,223 views. Constructiontype and certain productiontype contracts aicpa. Sop 972 is the accounting standard that requires apple to. Multipledeliverable revenue arrangements a consensus of the fasb emerging issues task force, as further described below. A comprehensive guide software revenue recognition.
In october 1997, the aicpa issued statement of position sop 97 2, entitled software revenue recognition. The specter of revenue recognition erp software licensing. It applies to both public companies according to sab 104 and private enterprises. In issuing these sops, acsec determined that the same basic criteria for revenue recognition should apply to software arrangements as applied to. Modification of sop 97 2, software revenue recognition, with respect to certain transactions. 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. Under sop 972, recognition of revenue generally occurs at delivery if a fourpart conjunctive test is met. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. What follows is a summary of the current accounting guidance. Citeseerx constructiontype and certain productiontype. Costs of software to be sold, leased, or marketed, asc 985. Indeed, prior to sop 972, many software companies recognized revenues on their contracts by using a criticalevent approach. This guidance is codified in asc 985605, software revenue recognition. Acsec has issued sop 972, software revenue recognition, to replace sop 911 of the same name.
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