Academic journal article Journal of Accountancy

SOP 97-2 May Be Modified

Academic journal article Journal of Accountancy

SOP 97-2 May Be Modified

Article excerpt

The Institute has been working the kinks out of its recent SOP 97-2, Software Revenue Recognition. First, FASB gave AcSEC the go-ahead to issue SOP 98-4, Deferral of the Effective Date or a Provision of SOP 97-2, which deferred for one year certain portions of the SOP covering multiple-element arrangements. (See "Changes for SOP 97-2," JofA, May98, page 17.) Now, AcSEC has issued an ED, Modification of the Limitations on Evidence of Fair Value in Software Arrangements, to make that deferral permanent.

Specifically, SOP 98-4 deferred the second sentence of paragraph 10 in SOP 97-2, which limits vendor-specific objective evidence (VSOE) of the fair value of the various elements in a multiple-element arrangement to (a) the price charged when the same element is sold separately or (b) for an element not yet being sold separately the price established by management having the relevant authority. (Under SOP 97-2, if VSOE does not exist to support the fair value of each element, all revenue from the arrangement must be deferred.)

The guidance in that sentence would have led to unduly conservative patterns of revenue recognition, according to AICPA senior technical manager Fred Gill. Consider, for example, a piece of software that always comes with one year of telephone support. Because the software is never sold separately, all revenue from the arrangement would have to be deferred, even though the fair value of each element could be inferred from the price of the package and the price of renewal telephone support. …

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