Academic journal article Journal of Accountancy

Software Revenue Recognition - Revisited

Academic journal article Journal of Accountancy

Software Revenue Recognition - Revisited

Article excerpt

The accounting standards executive committee (AcSEC) is considering a statement of position that could change practices for some software companies. This issue goes back to December 1991, when the American Institute of CPAs issued SOP 91-1, Software Revenue Recognition, in an attempt to lend consistency to divergent reporting practices. However, continued inconsistencies in practice led AcSEC to propose a new SOP to replace it. At a May 1996 meeting, the Financial Accounting Standards Board unanimously gave AcSEC approval to expose the proposed SOP for comment.

The nature of how software is sold gives it special accounting problems. How does a software company allocate revenue when multiple products or services are delivered at different times? AcSEC member George P. Fritz said the exposure draft would require the company to "unbundle" revenue related to the products: "If you sell five products packaged together for $100, you have to allocate 1/5 to each item--S20 each, assuming the relative fair value of each item is the same. This SOP would narrow the determination of fair value, for allocation purposes, to vendor-specific prices. It would not allow prices to be estimated by comparing them with competitors' prices, for example." Companies would thus have much less latitude. If no individual prices have been established, revenue would have to be deferred--even for delivered elements.

Other controversies

Sometimes companies promise customers that upgrades and enhancements will be shipped "when and if available." The ED assumes "when" is more likely than "if" because a continued stream of enhancements and upgrades is often necessary to market software successfully. …

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