Current issues in vsoe accounting, sondhi, ashwinpaul c 2007 softrax. Mar 22, 2016 regulations new revenue recognition standard means big changes for software companies. The new standard is aimed at reducing or eliminating those inconsistencies, thus improving comparability, and eliminating gaps in guidance. Consequently, failure to establish vsoe under us gaap does not necessarily. If the providers warranty for the software is not shortterm and routine, that fact can jeopardize the providers ability to recognize all the license revenue immediately. Revenue recognition within the software industry has historically been highly complex with much industryspecific guidance. Revenue management and revenue recognition software. Revenue recognition for saas businesses is inherently complex, and depends on your specific revenue model. Apr 23, 2018 establishing vsoe of fair value can be extremely challenging, yet it is essential for revenue recognition compliance. Ninetyday warranties for software licenses seem to be accepted as routine. If vsoe is available for all elements, then revenue may be recognized as delivery occurs assuming all other conditions for revenue recognition are met. So, finrec has concluded that previously established vsoe is considered an observable standalone selling price.
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. Key areas and illustrative examples collectibility contract modifications identifying performance obligations contingent revenue costs to obtain a contract significant financing component performance obligations over time elimination of vsoe requirement for software. In accounting practices, vendorspecific objective evidence vsoe is a method of revenue. Accounting for bundled services multielement arrangements. For unprepared companies, vsoe calculation can be nightmare. The updated standard uses a different process to allocate the contract value and related discounts with the contract by eliminating the need to establish vendorspecific objective evidence vsoe, which may produce more aggressive revenue recognition. The current gaap standards for cloud and saas software companies, sop 972 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for revenue recognition. Netsuite was not only impacted by the new revenue recognition rules in its own business, but the software maker has developed a module to help companies implement the new revenue recognition.
What your boss wants you to know about vsoe youtube. Technology boom expands relevance of sop 972, regan, greg and regan, tim. How to comply with the new revenue recognition rules. As we noted previously, sop 972 software revenue recognition defines vsoe of fair value as the price charged when the same element is sold separately. Interestingly, for many technology companies, the new rules may accelerate the timing of revenue recognition versus todays gaap guidelines. Regulations new revenue recognition standard means big changes for software companies. This is meant to be a simple high level view, but you need to understand revenue recognition ill explain too. Vsoe is commonly used by companies that sell software products and services in multipleitem bundles. Now, as 2019 nears an end, public companies have adopted the new revenue recognition standard topic 606 and the adoption for private companies is here, right now. Regain control with softrax revenue automation software and implement the new revenue recognition rules with confidence. For example, vendorspecific objective evidence vsoe of the fair value of postcontract support pcs will no longer be required to unbundle a software license arrangement. This will generally result in more separate elements, and therefore earlier revenue recognition than under legacy us gaap. If the vendor cannot establish vsoe of fair value, it may have to defer recognizing all revenue until the last element in the contract is delivered. Netsuite s awardwinning financial management software enables accounting departments to account for any contract under any revenue standard, for any given set of products and services including software and service contracts specified in accordance with asc 605 and various preceding standards.
Software companies will no longer need to establish vsoe in order to recognize revenue separately for different components of a contract. In an analysis of the new revenue recognition standard, matt kelly and pranav ghai noted, numerous firms say they plan to implement the standard by january 1, 2018but still report that they are uncertain about its possible effect, or even what adoption method they will use. May 03, 2016 the future of revenue recognition asc 606. Jan 01, 2008 revenue recognition problems, namely with vsoe, are probably the leading cause of restatements among software companies, says jeffrey szafran, managing director at huron consulting group. Software license revenue attributable to distinct software licenses is recognized at the point in time the customer obtains control of the. Separate rules for software sop 972 and vsoe of fair value. With the new revenue recognition standard effective date approaching, kpmg offers insight on the most significant industry issues. New revenue guidance implementation in the software industry. Revenue recognition in software arrangements will no longer be deferred if vendorspecific objective evidence vsoe of fair value is not established for undelivered goods or services, since revenue is allocated to all performance obligations on the basis of either an observable or an estimated standalone selling price. Vsoe and essential to the functionality no longer drive the determination of separate contract elements.
Revenue recognition rules leveling the playing field 1. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. Revenue recognition for subscription businesses leapfin. Gaap a highly specialized guidance is available for recognizing software revenue and one of its aspects focuses on the requirement to demonstrate vsoe of fair value so that different software. For example, a company should not deliver a product along with yearly support services. Softrax enterprise revenue management software, offers innovative revenue recognition software solutions to help companies automate asc 606 rules sales. If vsoe does not exist for all software elements, then revenue. Ceos and cfos of software companies may not understand all the ramifications of revenue recognition or vsoe.
This resulted in a distorted view of revenue because particular items could not be booked as long as some deliverable remained outstanding. Vsoe is listed in the worlds largest and most authoritative dictionary database of abbreviations and acronyms. The new revenue standards asc 606 and ifrs 15, revenue from contracts with customers replace industryspecific. The requirements for establishing vendorspecific objective evidence vsoe under the old revenue recognition standard were stricter than the criteria to qualify for the residual approach. Nov 30, 2010 netsuite was not only impacted by the new revenue recognition rules in its own business, but the software maker has developed a module to help companies implement the new revenue recognition rules. If vsoe does not exist for all of the elements, then the order of delivery of those elements can. This generally results in more separate elements, and therefore earlier revenue recognition than under legacy us gaap. May 10, 20 under previous revenue recognition rules rev rec in accountant speak, software providers were forced to defer all of the revenue, even though some of the components were fully delivered. For a discussion of the key considerations for technology entities that do not currently apply software guidance, refer to our applying ifrs, the new revenue recognition. The recognition criterion is based on company specific evidence that the product has been delivered. One such method is the stated renewal rate for customer support.
Comverse technology subsidiaries verint systems and ulticom inc. Aug 20, 2014 i am not sure whether analysis plays a big part to your question, but i can explain why vsoe is used in the software industry and what you should manipulate as one goes through the sales negotiations. If vsoe does not exist for all software elements, then revenue must generally be deferred until all elements have been delivered except under the residual method as noted above. Gaap a highly specialized guidance is available for recognizing software revenue and one of its aspects focuses on the requirement to demonstrate vsoe of fair value so that different software elements can be separated for accounting purpose. If the vendor cannot establish vsoe of fair value, it may have to defer recognizing all revenue. For software companies, asc 606 brings change, guesswork. Under asc 605, arcad must acquire vsoe to determine that pcs is separable from the software license, and this vsoe amount is used to allocate revenue to pcs. After years of debate, the financial accounting standards board fasb has issued final new guidelines on revenue recognition. Revenue recognition model 8,27 royalties 58,67 shipping and handling costs and fees 87 software industry key impact areas 11,12 revenue recognition issues 5356 solar industry. Revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. Vendor specific objective evidence vsoe law and legal. If a vendor improperly reports revenue in its financial statements based on inaccurate vsoe of fair values, it could result in serious consequences. Accountants and auditors require socalled vendorspecific objective evidence vsoe of the fair value of the contracts components so that it can properly determine the value of individual items and recognize partial revenue before the entire contract is fulfilled. The rules, which total 700 pages and represent a fundamentally new model for recognizing revenue, become effective in 2017 for nearly all public companies and the following year for nonpublic entities.
For software companies, asc 606 brings change, guesswork bi101. Nov 07, 2016 secs statement of postion sop 972, software revenue recognition and sop 989, software revenue recognition with respect to certain transactions, applied to all entities that license, sell, lease or market computer software. Netsuite s awardwinning financial management software enables accounting departments to account for any contract under any revenue standard, for any given set of products and services including software. New revenue recognition standard means big changes for. Assuming vsoe is obtained and pcs is separable, arcad would recognize revenue on a straightline basis over time. Revenuerecognition problems, namely with vsoe, are probably the leading cause of restatements among software companies, says jeffrey szafran, managing director at huron. Software revenue recognition on the rise journal of accountancy.
Jun 05, 2007 abc concludes that this range is not sufficiently narrow to establish vsoe of fair value for the pcs under the stated renewal approach. Implementing the new revenue guidance in the technology. It specifies that revenue from an arrangement involving multiple elements should be. Oct 21, 2011 software revenue recognition residual method multiple element arrangements. Implementing the new revenue guidance in the technology industry. Revenue recognition for hardware integrated with saas. Fortunately for most businesses, asc 606 brings a level of consistency and.
Feb 07, 2017 also, be sure to check out our revenue recognition hub for for information about asc 606, vsoe, and more. Vsoe focuses on the fair market value of an item sold individually, as opposed to the assigned sales value of the item sold as part of a multipleelement bundle. In simple terms, this would equate to what the company would charge if the component were sold separately. The revenue associated with a given element is recognized after the firm performs its obligations related to that element e. The fasb core principle of the new standard is as follows. Kpmg explains how the revenue standard asc 606 applies to software licensing. For a discussion of the key considerations for technology entities that do not currently apply software guidance, refer to our applying ifrs, the new revenue recognition standard technology january 2015 technology. Abc concludes that this range is not sufficiently narrow to establish vsoe of fair value for the pcs under the stated renewal approach. Vendor specific objective evidence or vsoe has boggled accountants for software companies since its inception in 1997. Vsoe revenue recognition is commonly used by companies that sell software products and services in multipleelement bundles. Jul 05, 20 as we noted previously, sop 972 software revenue recognition defines vsoe of fair value as the price charged when the same element is sold separately. Jul 31, 2014 revenue recognition in software arrangements will no longer be deferred if vendorspecific objective evidence vsoe of fair value is not established for undelivered goods or services, since revenue is allocated to all performance obligations on the basis of an estimated standalone selling price. Aug 17, 2012 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.
Instead of having separate rules for revenue recognition for each industry, the fasb are now finalizing plans to consolidate the rules to be able to apply to any type of business to be effective in december 2017, or 2019 for private companies. Software, services and contract accounting part 2 eitf 081 multiple deliverable revenue arrangements relative selling. Establishing vsoe of fair value can be extremely challenging, yet it is essential for revenue recognition compliance. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and software related transactions. Assuming pcs is the only undelivered element and all other revenue recognition. Revenue recognition can be challenging in software arrangements that include service elements. Vsoe calculation using the bell curve approach bi101. Revenue recognition standards for software companies in 2018. Vendor specific objective evidence vsoe is the fair value for software.
Under asc 606 if the software and pcs meet the distinct criteria, the lack of vsoe. The complete guide to saas revenue recognition with asc. Secs statement of postion sop 972, software revenue recognition and sop 989, software revenue recognition with respect to certain transactions, applied to all entities that license, sell, lease or market computer software. Revenue recognition in software arrangements will no longer be deferred if vendorspecific objective evidence vsoe of fair value is not established for undelivered goods or services, since revenue. If the vendor cannot establish vsoe of fair value, it may have to defer. Vsoe refers to a method of revenue recognition in accounting practices allowed by the u. The future of revenue recognition deloitte united states. The impact of the new revenue recognition guidance on cloud. Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas software. Vsoe is no longer the only basis for allocating contract revenue to contract elements.
The new revenue standards asc 606 and ifrs 15, revenue. Under asc 606 if the software and pcs meet the distinct criteria, the lack of vsoe for the pcs does not result in the. Nonetheless, under the new revenue recognition rules, vizzy would separate the license and pcs deliverables even though vizzy does not have vsoe for the. As we said, asc 606 ditches some of the truly complex rules in favor of giving software companies more opportunity to make reasonable judgments about their revenue and how its recognized. Jan 17, 2016 the revenue associated with a given element is recognized after the firm performs its obligations related to that element e. Differences between gaap and ifrs on revenue recognition. Overview of effects of vsoe of fair value on revenue recognition. I am not sure whether analysis plays a big part to your question, but i can explain why vsoe is used in the software industry and what you should manipulate as one goes. Never within the minutiae of the sop does the securities and exchange committee define a single method for establishing vsoe. Review of general principles and multiple element arrangements. I think though just as a reminder, sometimes there are business decisions that get made and it is not always wrong for a contract term to impact. Software, services, and contract accounting part 1 november 17, 2011. A world without software specific revenue guidance and without vsoe the new revenue standard was issued in 2014, and the 2018 and 2019 application date once seemed like a long way off. For example, vendorspecific objective evidence vsoe of the fair value of postcontract support pcs will no longer be required to unbundle a software.
The use of vsoe is intended to allocate revenue among the transactions products or services in a way that reflects the true fair value of its elements. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. If a vendor improperly reports revenue in its financial statements based on inaccurate vsoe. Instead of having separate rules for revenue recognition for each industry, the fasb are now finalizing plans to consolidate the. The use of vsoe is intended to allocate revenue among the transactions products or services in a way that reflects the true.
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