Out of the box software this is prepackaged software that is sold to customers. Overview of asc 606, which provides a highlevel summary of the guidance in topic 606. Sop 972 software revenue recognition58 and fasb issued standard. A prominent consultant discusses some of the top trends and issues in the erp software arena. Banking, finance and accounting business law computer software industry accounting and auditing industry sales and revenue marketing software industry. Sop 911 and sop 97 2 were issued by the aicpa to provide industry. Sop 972 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. Sop 911 stated that the accounting treatment of undelivered elements in a contract depended on the. The changes in standards will impact all companies, and even if the extent of change for a particular industry or company is slight, the disclosures necessary to explain the changes and when implemented, to describe. Meanwhile, medical device companies may have to analyze warranties, shipping terms. 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.
Us gaap, revenue recognition, software, asc 606, apple inc. However, the amendments in this update will also affect vendors that are affected by the guidance in accounting standards update no. 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. Accounting for the costs of computer software to be sold, leased, or otherwise marketed asc 985605. Multipledeliverable revenue arrangements a consensus of the fasb emerging issues task force, as further described below. Led a multiyear project for sarbanesoxley 404 compliance for the domestic and canadian operations of a medical radiology software development firm. Revenue recognition bearing in mind that the global software industry is centred in the us, it is unsurprising that a us standard statement of position sop 972, software revenue recognition. Software revenue recognition on the rise journal of accountancy. Kpmg guides and publications relevant to fasbs new revenue standard. Software revenue recognition deloitte accounting research tool.
Before sop 972 was issued, us gaap rules on software. For software companies, asc 606 brings change, guesswork. Revenue recognition for software companies the power of. Credit and collectionmanager omnicell, inc 90 e middlefield rd, mountain view, ca 94043. A fixed fee includes amounts designated as minimum royalties.
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. Costs of software to be sold, leased, or marketed sfas 86, august 1985 accounting for the costs of computer software to be sold, leased, or otherwise. 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 key impact areas 19 standalone selling prices ssp 81 taxes billed to customer sales, vat, etc. Kpmg explains the revenue standard asc 606 in detail. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable. Revenue recognition accounting for cloud computing saas. Fasb conceptual framework non monetary transactions. Mandatory effective dates and early adoption provisions.
Own the company\s revenue recognition policy and ensure proper accounting treatment is in place for all revenue arrangements. Revenue recognitionsoftware an overview publish your. The solution to these new compliance requests is to automate the revenue recognition process. May 10, 2007 overview of sop 97 2 sop 97 2 provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing, or otherwise marketing computer software. Software is not revenuegenerating until it is shipped, so associated costs should be matched. Accelerating it planning for revenue recognition changes cfo. Sop 972, software revenue recognition, provides guidance on when. May 08, 2007 separation and allocation criteria of sop 97 2 when an arrangement includes multiple elements within the scope of 97 2, the sop requires that vendorspecific objective evidence vsoe, of fair value be available for the elements in order to seprate the arrangement and to account for each element of the arrangement separately. Overview of sop 972 sop 972 provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing, or otherwise marketing computer software. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 972, sab 104, and eitf 0021. 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 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.
Issued in october 1997, aicpa statement of position sop 97 2, software revenue recognition, provides detailed guidance on accounting for revenue associated with software and software related arrangements. Sep 27, 2010 an entity would need to consider the relevant scoping guidance in asc section 98560515 to determine whether an arrangement is in the scope of the software revenue recognition guidance. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Asc 985605 codification of sop 97 2 addresses software revenue recognition. Sop 972 to provide vendor specific objec tive evidence. Executive summary statement of position sop 972 provides guidance on. Software revenue recognition exposure revenue is a key factor in the valuation of a company. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. Vendor sales reps keep using an age old excuse out of habit many organizations start their q4 software maintenance renewals process in september.
She has examined possible areas of confusion in applying the standard, which brings order to an accounting area long marked by diverse practices. Asc 35040 codification of sop 981 addresses software developed or obtained for internal use, which does not apply in this case. Softrax revenue management industry news 45 shawmut road canton, ma 02021 sales. However, the amendments in this update will also affect vendors that are affected by the guidance in accounting standards. In the united states of america complex revenue recognition rules are applied sop 97 2. Gerard worked as novells emea internal audit manager and, most recently, as novells emea revenue controller. Revenue management and revenue recognition software. Out of the box software this is prepackaged software that is sold to customers without any modifications. Separation and allocation criteria of sop 972 when an arrangement includes multiple elements within the scope of 972, the sop requires that vendorspecific objective evidence vsoe, of. Sep 05, 20 however, with the release of sop 97 2, revenue recognition rules and the new joint rules regarding revenue recognition for software companies released by the fasb and iasb earlier this year, the game has changed. Aicpa revenue recognition task forces software, telecom, etc. Gerard reynolds risk and compliance manager microsoft. Accelerating it planning for revenue recognition changes.
The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. As a result of this fact companies are often pressed to recognize revenue as early as possible. As previously stated, asc 98520 codification of sfas 86, 0895 applies to costs of software to be sold, leased, or marketed to others. Certain revenue arrangements that include software elements a. Sop 911 and sop 972 were issued by the aicpa to provide industry. The first guideline about software revenue recognition, sop 911, was issued in january 1991 by the aicpa.
Gaap codification of accounting standards guide by. For example, a company may consider itself a software company but it delivers a service whereby the customer never takes possession of the software. Accrual accounting requires aicpa sop 97 2 software. Mary pat mccarthy, national director of kpmg peat marwicks software and services practice, has coauthored software revenue recognition. Think of the operating system on a pc, everything could be recognized on shipment. Recognize the software, recognize the pitfalls journal. 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 key impact. 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. Revenue recognition for selling hardware plus software. Sop 972 defines a fixed fee as a fee required to be paid at a set amount that is not subject to refund or adjustment.
Everything you need to know about vsoe but are afraid to ask paul lamparski finance director, global revenues. New standards update sop 972 software revenue recognition. Since the issuance of sop 911, practice issues had been identified that acsec believed had not been addressed adequately in the technical literature. Since the issuance of sop 911, practice issues had. In sop 97 2 companies are given more guidance in applying. Own the company\s revenue recognition policy and ensure proper accounting treatment is. When the company licenses its software in multiple element arrangements in which the customer pays fees for maintenance, licensing and hosting, the company recognizes revenue using the residual. Sop 972 software revenue recognition also addressed the idea of recognizing revenue when software and hardware components operated in conjunction with each other.
November 2016 updated june 2019 we have prepared a white paper, revenue recognition. 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. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and softwarerelated transactions. Revenue recognition bearing in mind that the global software industry is centred in the us, it is unsurprising that a us standard statement of position sop 97 2, software revenue recognition provides detailed guidance on the appropriate treatment of virtually every type of software transaction. Multipleelement arrangements containing items that. Revenue recognition sab 104, sop 972, eitf 081, asc 606. Executive summary statement of position sop 97 2 provides guidance on applying gaap in recognizing revenue from software and software related transactions. This has led to a flurry of emails and phone calls about revenue recognition a. Primarily serviced clients in the software industry with an emphasis on software revenue recognition issues under sop 972 for multielement arrangements, and capitalization of internalexternal software. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the. Regain control with softrax revenue automation software and implement.
Makes things less strict, so that if the software is essential to the functioning of the hardware, its excluded from software revenue guidance. Software revenue recognition, statement of position 972 am. Meanwhile, medical device companies may have to analyze warranties, shipping terms, consignment sales, customer financing, and the potential applicability of lease and software revenue recognition requirements. View sonya bokharis profile on linkedin, the worlds largest professional community. Asu 200914 excludes tangible products and related essential software elements from the scope of revenue recognition for software arrangements. Helped to devise controls for sop 989 and sop 97 2, software revenue recognition. Sop 972 archives a software insiders point of view. It should be applied to those activities by all entities that earn such revenue. Kpmgs revenue recognition survey of technology companies. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. An entity would need to consider the relevant scoping guidance in asc section 98560515 to determine whether an arrangement is in the scope of the software revenue recognition guidance. At the time of its issuance, sop 97 2 primarily applied to companies that sold software. Start ups, software revenue recognition sop 972, multipleelements arrangements, due diligence.
Sop 97 2 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. Sonya bokhari global head of finance sap health sap. But a software application sold along with the hardware would still be under sop. Software is not revenue generating until it is shipped, so associated costs should be matched for the period of sale. Software revenue recognition aicpa sop 972 software revenue recognition accounting. Paragraphs 2633 of sop 972 discuss how to apply the fixed or determinable fee criterion in software.
Revenue recognition rules for bundled sales in high technology. 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. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 97 2, sab 104, and eitf 0021. Cloud based computing arrangements non refundable deposit. One of the difficulties lies in determining whether or not 972 applies. 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.
Gerard did an exceptionally good job learning and managing the complex software revenue recognition rules and processes at novell. The statement splits software sales into two different categories. Asc 985605 codification of sop 972 addresses software revenue. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. Financial reporting software industry and ias a hard. It should be applied by all entities that earn such revenue. Background senior manager kpmg 1987 1998 vp finance telepost 1998 2000 cfo antrim design 2000 2001. Asc 606 implementation strategy with connor group and. However, with the release of sop 972, revenue recognition rules and the new joint rules regarding revenue recognition for software companies released by the fasb and iasb earlier this year.