However, previous revenue recognition guidance differs in generally. Banking, finance and accounting business law computer software industry accounting and auditing industry sales and revenue marketing software industry. Software revenue recognition class software revenue recognition agenda, day two. According to the principle, revenues are recognized when they are realized or realizable, and are earned usually when goods are transferred or. Revenue recognition accounting for software as a service. The 4 pillars of revenue recognition sop 972 and sab 104. 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. Introduction overview in october 1997, the american institute of certified public accountants aicpa adopted a new set of guidelines for revenue recognition in software transactions. 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. The interpretation of sop 972 has become more restrictive since its inception.
Purpose this revenue procedure provides guidance to taxpayers that maintain books and records by using an electronic storage system that either images their hardcopy. 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. That may shift was the deliberation process continues. They both determine the accounting period in which revenues and expenses are recognized. Banking, finance and accounting business accounting accounting software. The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 972, sab 104, and eitf 0021.
As we mentioned in yesterdays post, software companies tend to bundle together software licenses fees, installation and maintenance services, training, upgrade rights, and professional services into a multielement product offering. All of the methods of allocating revenue in those sops, including the residual method discussed in sop. Software companies and revenue recognition feature law. The latest chapter in that history is statement of position sop 972, software revenue recognition, issued by the aicpas accounting standards executive committee acsec in october 1997. Revenue recognition accounting for software as a service saas.
If it is a software sale, then it is recognized following the rules outlined within asu 2009 regarding revenue recognition in multiple element arrangements. As a result of this fact companies are often pressed to recognize revenue as early as possible. What is appropriate in terms of accounting for and recognising the revenue emanating from softwarerelated contracts. Revenue recognition under multielement arrangements. As the customer is not given this option, the arrangement is recognized as a service contract. A rising discontent of investor over revenue recognition under a proforma method as in the financial statement of computer associates underlines the recognition question of intangible assets, such as.
Accounting for performance of constructiontype and certain production. Revenue recognition in software delivery cleverbridge. Additional guidance on allocating among elements may be found in sop 811, paragraphs 35 through 42. Software revenue recognition exposure revenue is a key factor in the valuation of a company. We have a great sop 972 revenue recognition checklist available that is intended for use with each sale made of software. In the united states of america complex revenue recognition rules are applied sop 97 2. The challenges of improving revenuerecognition standard. I investigated whether implementing sop 97 2, the revenue recognition standard for the software industry, reduces earnings informativeness.
Identify the difference between software and hardware criteria for revenue recognition. Sop 972, software revenue recognition, provides guidance on when revenue should be recognized and in. The challenges of improving revenuerecognition standard for. Lpi software funding group leaders in the software. Revenue is one of the most important measures used by investors in assessing a companys performance and prospects. 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. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 97 2, sab 104, and eitf 0021. Section 28 of the sop indicates that revenue recognition is presumed to be delayed if a significant portion of the licensee fee is due more than 12 months after delivery. Since the issuance of sop 972, us standard setters released a wide range of guidance over 50 publications in all. Other models for multiple element accounting already exist in generally accepted accounting principles including sop 811, accounting for performance of constructiontype and certain productiontype contracts, and sop 97 2, software revenue recognition. As we mentioned in yesterdays post, software companies tend to bundle together software licenses fees, installation and maintenance services, training, upgrade rights, and. Revenue recognition timing and attributes of reported. Instead, aicpa sop 972 software revenue recognition has significant influence way beyond the industry for example, the obvious influence on sec sab topic, especially in the area. What follows is a summary of the current accounting guidance.
Jul 03, 20 revenue recognition under multielement arrangements by kevin lalor jul 3, 20 as we mentioned in yesterdays post, software companies tend to bundle together software licenses fees, installation and maintenance services, training, upgrade rights, and professional services into a multielement product offering. This standard is particularly important for two reasons. Carmichael, software revenue recognition under sop 972, cpa j. Sop 911 mandates the deferral of software revenue until.
Discretion in revenue recognition timing and comparability. While these firms are largely unaffected by sop 972 and eitf 093, they share a similar emphasis on revenue growth opportunities. 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. In december 1991, the american institute of certified public accountants aicpa issued sop 911 entitled software revenue recognition. We have a great sop 97 2 revenue recognition checklist available that is intended for use with each sale made of software. Our global revenue from contracts with customers guide is a comprehensive resource for entities accounting for revenue transactions under asc 606 and ifrs 15. Revenue recognition for software companies softrax industry. It has been updated through august 2019 to provide our latest. I investigated whether implementing sop 972, the revenuerecognition standard for the software industry, reduces earnings informativeness. As evidence that change is the only constant, sop 972 software revenue recognition has subsequently been modified again to adjust for changing business conditions. Use this 2 page predefined template as a general guide for recognition of software revenue in accordance with sop 972, sab 104, and eitf 0021. For example in the tech industry, current software revenue recognition rules are rooted in sop 972 1997 and multiple deliverable rules were expanded in. New standards update sop 972 software revenue recognition. The same is true for other substantial mixes that include intangible asset software and.
Software revenue recognition on the rise journal of accountancy. As evidence that change is the only constant, sop 972 software revenue recognition has subsequently been modified again to adjust for changing. Under sop 972, recognition of revenue generally occurs at delivery if a fourpart conjunctive test is met. Revenue recognition 5 step process silicon valley cpa. Jun 03, 2015 the 4 pillars of revenue recognition sop 972 and sab 104.
Software revenue recognition under sop 972 by carmichael. Sop 972, software revenue recognition, to arrangements that. Adjustments to sop 97 2 software revenue recognition. 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. The guidance of sop 97 2 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. Revenue recognition timing and attributes of reported revenue.
Oct 29, 2014 software revenue recognition class software revenue recognition agenda, day two. Jan 18, 2012 craig vodnik post author january 30, 2012 at 6. Aug 02, 2009 instead, aicpa sop 97 2 software revenue recognition has significant influence way beyond the industry for example, the obvious influence on sec sab topic, especially in the area where. While ias 18 addresses revenue recognition broadly, there is no parallel in ifrss to sop 972. The accounting requirements within the standard have been modified by asu 2009 and asu 200914. What is appropriate in terms of accounting for and recognising the revenue emanating from software related contracts. The changing requirements of sop 972 software revenue recognition. The resulting change is most significant to software companies because of the. The application of revenue recognition in the software market is a very complex topic and thankfully there are companies out there that have solutions to help businesses solve the problem at an affordable. There is much nuance in software revenue accounting which will be addressed in future posts.
Scribd is the worlds largest social reading and publishing site. Adjustments to sop 972 software revenue recognition. Eitf 081 supersedes the existing guidance on such arrangements and is effective for fiscal periods. Revenue from contracts with customers asc 606, global. The case of software industrys adoption of sop 911.
The focus of the second part of this article will be on providing the lawyer the following. Sop 911 mandates the deferral of software revenue until delivery of the underlying software has occurred, in addition to recognizing revenue from maintenance and support services, including such revenue. Revenue recognition under multielement arrangements bi101. Key impacts of recent changes to revenue recognition standards. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. It should be applied by all entities that earn such revenue. The company provides its customers with hosted access to certain software applications for a fixed monthly or annual fee. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and. However, if the software is actually sold as a service, or saas model, then revenue recognition needs to follow the rules established by sab 104 and sop 972.
Significance of revenue recognition background of sop 911 and the new sop a practical process for analyzing revenue recognition appendix i flowchart revenue recognition on software arrangements. Until then we have asc 985605 to guide us through software revenue recognition. I then estimate comparability in firms revenue recognition, using measures based on the model developed by defranco et al. 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. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. And, given the genesis of sop 972, thats not surprising.
Revenue arrangements with multiple deliverables bpm accounting. The single price complicates revenue recognition significantly. In sop 97 2 companies are given more guidance in applying the. How to treat setup and implementation fees survey results included. Since the issuance of sop 972, standard setters have released numerous standards clarifying specific aspects of software revenue recognition sop 984.
In sop 97 2 companies are given more guidance in applying. Revenue recognition software sop 972 wittsiepe consulting. Software delivery should be straightforward and require. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. The company provides its customers with hosted access to certain software applications for a fixed. New guidelines for software revenue recognition practical. The guide addresses each step of the fivestep revenue recognition model, along with other practical application issues. It also highlights the most important provisions of gaap related to software revenue recognition. First, its provisions coincide with provisions of sab 101, the current general revenue recognition standard. Software revenue recognition rules for subscription services. However, this product offering is negotiated and sold at a single price. C04 the right way to recognize revenue free download as word doc.