* Statement of Position (SOP) 97-2 provides guidance on applying GAAP in recognizing revenue from software and software-related transactions. The SOP provides instruction on recognition for licensing, selling, leasing or otherwise marketing software.
* As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software sector are beginning to realize that the economic value of their offerings resides in the underlying technology--software--subjecting those products to software revenue recognition rules.
* One of the critical concepts established by SOP 97-2 is vendor specific objective evidence (VSOE). The term is generally compatible with fair value. If a company is unable to assert that it possesses VSOE for each element in a multiple-element arrangement, the likely result is deferral of some, if not all, of the arrangement's associated revenue.
* Companies that want to avoid SOP 97-2 should limit their software support practices and obligations. Post-contract support, such as updates or upgrades, and ongoing services provided to customers are often separating factors in determining whether SOP 97-2 is applicable, given that they introduce multiple-element accounting and thus may have a direct impact on a company's recorded revenue.
When Statement of Position 97-2, Software Revenue Recognition, was issued in October 1997, it was clear that all software companies would transition to this new standard. 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.
As technology becomes further woven into consumer and enterprise products ranging from cell phones to copiers, companies in unlikely and sometimes unsuspecting industries are beginning to realize that the true economic value of their offerings is not in their machinery or hardware, but rather in the product's underlying technology-its software.
As a result, software revenue recognition is becoming a reality for many professionals, a fact that can be unnerving in light of the complexities inherent in software accounting rules. This article will help CPAs address the presence of software in a transaction and decide what revenue recognition rules apply. It also highlights the most important provisions of GAAP related to software revenue recognition.
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. It should be applied by all entities that earn such revenue. It does not apply to revenue earned on products or services containing software that is incidental to the products or services as a whole.
So what are the consequences of falling within the software revenue requirements? The same basic revenue recognition rules, such as SEC Staff Accounting Bulletin no. 104, Revenue Recognition, apply Evidence of the arrangement or transaction must exist; the fee must be fixed or determinable; delivery must be complete; and collection of the fee must be probable. However, the terms for satisfying each requirement are different from basic revenue recognition requirements.
The consequences of not complying with the rules loom large. If companies are taken by surprise and are unable to develop the requisite analysis, they may be unable to prepare financial statements in accordance with GAAP.
Such was the case with Tokyo-based NEC Corp. The information technology, mobile and electronic device company announced in September that it was unable to complete the analysis necessary under SOP 97-2 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 multiple-element contracts. …