Software licensing versus saas the revenue and cost recognition rules that different than the accounting rules that software licensing companies employ. Basic software revenue recognition experience in sop 97 2 essential strong it skills, knowledge of excel, oracle financials, business object, essbase advantageous asian languages including mandarin, japanese, korean and others advantageous open communicator with the ability to influence business partners essential. Sop 972 has also been interpreted by the emerging issues task force eitf 003, application of aicpa statement of position 972 to arrangements that include the right to use software. 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. Trg the iasb and the fasbs joint transition resource group for revenue recognition.
New guidelines for software revenue recognition practical. Statement of position 972 continues to help financial statement preparers. It applies to both public companies according to sab 104 and private enterprises. While the new revenue recognition standard has and will affect entities differently depending on their facts and circumstances, we have briefly summarized for corporate executives cxos some of the common significant themes associated with its application by entities in the software and softwareasaservice saas sectors, using insights and perspectives learned in the past year as public.
Citeseerx document details isaac councill, lee giles, pradeep teregowda. As a product manager you should really be aware of these when the cfo knocks on your door or cube and starts talking about software revenue recognition. Software revenue recognition aicpa sop 97 2 software revenue recognition accounting for the costs of software for internal use asc 35040 based on aicpa sop 981 three stages to develop software 1. Citeseerx constructiontype and certain productiontype. This staff accounting bulletin summarizes certain of the staffs views in applying generally accepted accounting principles to revenue recognition in financial statements. Software revenue recognition rules and postcontract support. The statement splits software sales into two different categories. Software revenue recognition class software revenue recognition agenda, day two. Software revenue recognition under sop 972 by carmichael. Senior accountant revenue recognition jobs, employment. But at the managerial level, what should an effective subscription revenue income statement.
At the time of its issuance, sop 972 primarily applied to companies that sold software. The company follows financial accounting standards board fasb accounting standards codification asc 985. The new guidance standardizes how companies should recognize revenue under u. Citeseerx aicpa statement of position 972, software. The statement was released due to changing business models within the software industry and was known as sop 972 software revenue recognition. Application of sop 972, software revenue recognition, to transactions involving software enabled devices is leading more and more to financial statement presentation that does not always. The complete guide to saas revenue recognition with asc 606. Key complications however, saas companies often cant satisfy those fasb criteria.
This guidance is codified in asc 985605, software e revenue recognition. All of the methods of allocating revenue in those sops, including the residual method discussed in sop. To embed the entire object, paste this html in website. The same is true for other substantial mixes that include intangible asset software and. Just as with revenue recognition an accounting principle process for reporting revenue through the monetary value recognition of a transaction contract over a given period of time as it is earned saas revenue recognition. The costs of revenue recognition as revenue recognition accounting changes, companies are spending more time and money to keep up. Understand, apply and update your knowledge of the changing practices of revenue recognition. Applicability of aicpa statement of position 972 to certain. Saas is different an accounting primer for saas companies.
This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the impact of the new standard to revenue. The fasb and the iasb are working on a converged model for customer contracts that will completely revamp the revenue recognition rules and replace much of the guidance currently in place. The ultimate objective of attributing arrangement consideration is to determine when the arrangement consideration should be recognized as revenue. Areas for investor scrutiny on revenue recognition changes. Everything you need to know about vsoe but are afraid to ask paul lamparski finance director, global revenues. Additional guidance on allocating among elements may be found in sop 811, paragraphs 35 through 42. In october 1997, the aicpa issued statement of position sop 972, entitled software revenue recognition. Software revenue recognition rules and postcontract. With a mature product, where you already have established vsoe for maintenance, typically 15 20% of license fee, my experience is that the normal mix of revenue is 20% maintenance, 5 10%. Accounting for the costs of computer software to be sold, leased, or otherwise marketed asc 985605.
By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. If fair value has not been established on each element, then all revenue. The rules for software revenue recognition are varied and complex for details, read the american institute for certified public accountants statement of position 972. American institute of certified public accountants.
Issued in october 1997, aicpa statement of position sop 972, software revenue recognition, provides detailed guidance on accounting for revenue associated with software and software related arrangements. When statement of position 972, software revenue recognition, was issued in october 1997, it was clear that all software companies would transition to this new standard. That being said, my read of your question implies to me your company is not saas, but regular sop 97 2 software. Financial reporting developments software e revenue recognition iii 1 introduction and scope 1. Revenue recognition accounting for software as a service. Jun 29, 2015 our latest survey of saas companies reveals two compelling shifts in revenue recognition. The issue is whether non software deliverables included in an arrangement that contains software. Inquiry as discussed in paragraph 3 of sop 972, software revenue recognition, in connection with the licensing of an existing product, a vendor might offer a small or insignificant discount on additional licenses of the licensed product or other products that exist at the time of the offer but. The american institute of certified public accountants statement of position 972 sop 972 provides that a company cannot report revenue as realized earned until it delivers the product or service. Sop 972 refers to arrangements in which software vendors bundle their software products with myriad services or other products as multipleelement.
For most software accounting departments, it became the bane of their existence. 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. Modification of sop 972, software revenue recognition, with respect to certain transactions. Revenue recognition is a generally accepted accounting principle gaap and a fundamental aspect of the accrual basis of saas.
Fasb staff document revenue recognition potential changes. Revenue recognition for saas businesses is inherently complex, and depends on your specific revenue model. As saas business models and gaap revenue rules have evolved, companies have adapted their revenue recognition practice, especially in light of the new fasbiasb revenue recognition standards effective for public companies in 2017 and private companies in 2018. Under existing guidance, customer acquisition costs for saas providers. Revenue recognition for software companies softrax. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Eitf 0801, fasb revenue recognition adoption best practices. If fair value has not been established on each element, then all revenue needs to be deferred until the contract is complete. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. Softrax resource center revenue management resources. Sop 972, software revenue recognition, as codified in asc topic 985, to software. The determination of whether customer arrangements should be treated as licensing or saas arrangements is important since it determines which accounting rules apply for both revenue and cost recognition. New standards update sop 972 software revenue recognition.
Gaap codification of accounting standards guide by. 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. What was not clear was how bright lines would blur for companies outside of the traditional software sector as technology evolved over the next decade. The primary authority for software revenue recognition is aicpa statement of position sop no. The guidance in asc 985605 is applicable to transactions involving the licensing. Kpmgrs evenue recognition survey of technology companies. Accounting standards executive committee, software revenue recognition. Simplify complex accounting processes with highlyconfigurable revenue recognition and accounting automation software.
The portfolio includes an extensive analysis of the applicability and application of american institute of certified public accountants aicpa statement of position no. Determining how and when to recognize revenue for software licensing arrangements continues to be challenging even though it has been more than a decade since the accounting standards executive committee acsec of the american institute of certified public accountants aicpa issued statement of position 972, software revenue recognition. New revenue recognition rule is tricky for software and. Applicability of aicpa statement of position 972 to. What was not clear was how bright lines would blur for companies outside of the traditional software. Apr 19, 2010 in the arcane world of tax law, there is an ogre of a rule that has choked a few deals to death. The right way to recognize revenue journal of accountancy. Includes online accounting software, enterprise resource planning erp. Activities or transactions within the scope of sop 972, software revenue recognition section 10,700 f.
The impact of the new rule for a softwareasaservice saas company like. Examples of the application of certain provisions of this statement of position 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. The new standard not only changes financial statement. The guidance of sop 972 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. Under sop 972, if a vendor agreed to deliver unspecified software in the. This podcast addresses the impact of the fasbs new revenue recognition standard on financial reporting in the software industry, and answer some questions investors may have about the. The staff is providing this guidance due, in part, to the large number of revenue recognition.
Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions. Application of sop 972, software revenue recognition, to transactions involving softwareenabled devices is leading more and more to financial statement presentation that does not always provide a reasonable representation of a companys performance. The result is that several ifrs reporting companies e. Financial reporting developments software revenue recognition 1 1 introduction and scope 1. The guidelines, entitled statement of position 972, software revenue recognition, described in this article as the new sop supersedes statement of position 911 sop 911 on the same subject. Experience with software revenue recognition and subscription billing. Your customers never take possession of the software during their subscription period, and its certainly not feasible for them to run the software on their own machines. Revenue recognition for software companies softrax industry. Software licensing is generally treated for accounting purposes as a sale or licensing of a product. Revenue recognition on software arrangements appendix c of sop 972. To link to this page, paste this link in email, im or document. Jun, 20 a very openended question kind of similar to what is the best flavor of ice cream. Out of the box software this is prepackaged software that is sold to customers without any modifications. Regulations new revenue recognition rule is tricky for software and technology companies.
To link to the entire object, paste this link in email, im or document. Accelerate software license revenue recognition flexera. The initial discussion will enable you to understand the background and the impact of revenue recognition. The new saas revenue recognition standard has finally been issued, and now the real work begins. Aicpa statement of position 972, software revenue recognition aicpa statement of position 989, modification of sop 972, software revenue recognition, with respect to certain transactions issue. 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. Software revenue recognition has not gotten easier.
Examples of the application of certain provisions of this statement of position appendix a of sop 972 104 response to comments received appendix b of sop 972 109 revenue recognition on software. Software the primary authority for software revenue recognition is aicpa statement of position sop no. A comprehensive guide software revenue recognition. Revenue recognition accounting for software as a service saas. Revenue recognition accounting for saas software as a. Revenue recognition software accounting automation sap.
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. Featuring builtin dual guidance and realtime reporting, the sap revenue recognition solution can help you quickly mitigate risk, minimize manual input, and meet the latest standards in revenue and accounting policies. May 15, 20 the company recognizes software license revenue under asc 985605, formerly statement of position no 972 software revenue recognition, statement of position no. The changing requirements of sop 972 software revenue recognition. As set forth in concepts statement 5, paragraph 83, recognition. Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue. Statement of position 972 sop 972 software revenue recognition sop 972 was issued by the american institute of certified. Aicpa statement of position 984, deferral of the effective date of a provision of sop 972, software revenue recognition aicpa statement of position 989, modification of sop 972, software revenue recognition, with respect to certain transactions fasb emerging issues task force 003, application of aicpa statement of position. This guidance is codified in asc 985605, software revenue recognition. While the basis for software license revenue recognition is substantially governed by the provisions of statement of position no. In this paper, the pricewaterhousecoopers pwc global software practice examined certain situations in which adopting ifrs may require a reconsideration of revenue recognition.
Implementation of current and new accounting standards. Revenue recognition literature sop 972 and 989 sab 101 and 104 tpas aicpa technical practice aids eitfs 003, 0021, 035. Revenue wreckognition how a tax rule killed a saas deal. This is because according to the gaap software revenue recognition rules, revenue can only be recognized upon delivery if fair value has been established for each element within a contract. This presentation shows how a company can use saas for revenue recognition either as a software or service. Due to the increased prevalence of the software as a service 2 saas. Products within the scope of emerging issues task force eitf issue no. In this paper, the pricewaterhousecoopers pwc global software practice examined certain situations in which adopting ifrs may require a reconsideration of revenue recognition policies and practices that were driven by us gaap compliance. Kpmgs revenue recognition survey of technology companies. Saas revenue recognition concepts guide saas addict. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable. Fortunately for most businesses, asc 606 brings a level of consistency and clarity that did not exist before in saas accounting the wild west is being tamed, and thats a good thing for all of us. Created to influence the development of accounting standards and guidance, it was the 103rd statement issued by the aicpa. Software revenue recognition under asc 986605 formerly sop 972 multiple element arrangements under asc 60525 formerly asu 2009 and 200914 revenue recognition at saas companies.
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