Revenue recognition on software arrangements appendix c of sop 972. Although keys provide the customer with access to the software, delivery of a key is not necessarily required in order for the vendor to recognize revenue. 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. On october 27, 1997, the american institute of certified public accountants issued sop 972 as guidance to these complicated issues. All of the methods of allocating revenue in those sops, including the residual method discussed in sop. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. Created to influence the development of accounting standards and guidance, it was the 103rd statement issued by the aicpa. In sop 97 2 companies are given more guidance in applying the. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. Revenue recognition software sop 972 wittsiepe consulting. 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. The same is true for other substantial mixes that include intangible asset software and. According to sop 972 software revenue recognition rules, firms need to establish vendor specific object evidence vsoe on each separate element of a contract.
Jun 03, 2015 netsuite founded in 1998, netsuite inc. Revenue recognition accounting for software as a service saas. Software revenue recognition exposure revenue is a key factor in the valuation of a company. The primary source for the guidance within asc 985605 was aicpa statement of position 972, software revenue recognition. Before sop 972 was issued, us gaap rules on software.
Vsoe is for an sop 972 software with multiple elements arrangement and while you are correct in how you would deal with sop 972, but this ia a saas arrangement. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and. In the united states of america complex revenue recognition rules are applied sop 97 2. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 97 2, sab 104, and eitf 0021. Capitalizing software development costs in accordance with sop 981 guidelines is simplified with trackersuite. Although keys provide the customer with access to the. We have a great sop 972 revenue recognition checklist available that is intended for use with each sale made of software. N is the leading provider of cloud computing business management software suites for growing and midsize businesses.
In this study, i exploit a unique situation around the promulgation of statement of position sop 911 on software revenue recognition american institute of certified public accountants, 1991 in the early 1990s to empirically test the effects of early revenue recognition relative to the statement on the attributes of reported revenue. One of the difficulties lies in determining whether or not 972 applies. Software companies and revenue recognition feature law. Technical guidance on standards and practice issues. Out of the box software this is prepackaged software that is sold to customers without any modifications.
The 4 pillars of revenue recognition sop 972 and sab 104. This guidance is codified in asc 985605, software revenue recognition. In fact, for the three issues the sec identified as most important, the task force has issued statements specifically addressing revenue recognition. However, failure by the vendor to deliver a permanent key does not preclude revenue recognition if all other criteria prescribed by sop 972 are met. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 972, sab 104, and eitf 0021. Essentially, vsoe is the selling price the market is willing to pay for a particular good or service. Adjustments to sop 972 software revenue recognition. Software revenue recognition on the rise journal of accountancy. According to sop 97 2 software revenue recognition rules, firms need to establish vendor specific object evidence vsoe on each separate element of a contract. The accounting requirements within the standard have been modified by asu 2009 and asu 200914.
In october 1997, the acsec of the aicpa issued statement of position 972, software revenue recognition sop 972. Revenue recognition timing and attributes of reported revenue. 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 972. 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. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable. The increase in number of components of a single contract may result in earlier recognition of revenue for software companies compared to the timing under prior revenue recognition rules. Software revenue recognition class software revenue recognition agenda, day two. It was issued to address software revenue recognition rules and provide revenue guidance to anyone that included software in a product. Key impacts of recent changes to revenue recognition standards. Revenue recognition for hardware deliverables in software arrangements. We have a great sop 97 2 revenue recognition checklist available that is intended for use with each sale made of software.
Adjustments to sop 97 2 software revenue recognition. 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. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the. As evidence that change is the only constant, sop 972 software revenue recognition has subsequently been modified again to adjust for changing. As a result of this fact companies are often pressed to recognize revenue as early as possible.
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. 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. At the time of its issuance, sop 972 primarily applied to companies that sold software. New standards update sop 972 software revenue recognition. However, failure by the vendor to deliver a permanent key does not preclude revenue recognition if all other criteria prescribed by sop 97 2 are met. Issued in october 1997, aicpa statement of position sop 972, software revenue recognition, provides detailed guidance on accounting for revenue associated with software and softwarerelated arrangements. The primary source for the guidance within asc 985605 was aicpa statement of position 97 2, software revenue recognition. Capitalizing software development costs, sop 981 simplified. A brief history of revenue recognition in the software. 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. Banking, finance and accounting business accounting.
Revenue recognition for sales of software electronic. In this study, i exploit a unique situation around the promulgation of statement of position sop 911 on software revenue recognition american institute of certified public accountants, 1991 in the early. In sop 97 2 companies are given more guidance in applying the two general from it 595 at oxnard college. Oct 29, 2014 software revenue recognition class software revenue recognition agenda, day two. Additional guidance on allocating among elements may be found in sop 811, paragraphs 35 through 42. 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. Revenue recognition for hardware integrated with saas. The effective date for the new standard is periods beginning after dec. Software revenue recognition rules and postcontract support.
Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. It should be applied by all entities that earn such revenue. Banking, finance and accounting business law computer software industry accounting and auditing industry sales and revenue marketing software industry. New guidelines for software revenue recognition practical. Safari, skype, unix, speedup, torrents, ubuntu, windows. Thousands of customers globally use netsuites online products and professional services to manage all key business operationsincluding customer relationship management crm, order fulfillment, inventory, accountingerp. Aug 17, 2012 vsoe is for an sop 97 2 software with multiple elements arrangement and while you are correct in how you would deal with sop 97 2, but this ia a saas arrangement. Nusbaum in this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients. 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. The statement splits software sales into two different categories. Net, which allows organizations to easily identify and segregate capital versus noncapital software development work and expenditures.
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