Statements of Position

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Description

This proposed statement of position (SOP) provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. The basic principle is that revenue is recognized on delivery of software; some exceptions are discussed. The proposed SOP also discusses accounting for related services, accounting for transactions involving software that are primarily service transactions, the application of contract accounting to software transactions, and accounting for postcontract customer support. Briefly, the proposed SOP recommends the following: 1. Software licenses with no other vendor obligations—If collectibility is probable and the vendor has no obligations remaining under the sales or licensing agreement after delivering the software, revenue from the software licensing fees should be recognized on delivery of the software. 2. Software licenses with other insignificant vendor obiigations—If the vendor has insignificant obligations remaining under the sales or licensing agreement after delivering the software, revenue from the software licensing fees should be recognized on delivery of the software if collectibility is probable, and the remaining costs should be accrued or a pro rata portion of revenue should be deferred until completion of performance. 3. Software licenses with other significant vendor obligations—If, in addition to the obligation to deliver the software, the sales or licensing agreement includes other significant vendor obligations, the agreement should first be examined to determine whether it should be accounted for using contract accounting or as a service transaction. For agreements with significant vendor obligations beyond delivery of the software that are not accounted for using contract accounting or as service transactions, revenue should be deferred until all of the following conditions are met: a. Delivery has occurred. b. Other vendor obligations remaining are no longer significant. c. Collectibility is probable. 4. Significant uncertainties about customer acceptance—If, after delivery, there is significant uncertainty about customer acceptance of the software, license revenue should not be recognized until the uncertainty is removed. 5. Absence of a reasonable basis for estimating the degree of collectibility of receivables—Receivables associated with software transactions for which there is no reasonable basis of estimating the degree of collectibility should be accounted for using either the installment method or the cost recovery method of accounting. 6. Contract accounting—If a contract to deliver software or a software system, either alone or together with other products, requires significant production, modification, or customization of software, a system, or the other products, that contract should be accounted for in conformity with ARB 45, Long-Term Construction-Type Contracts, using the relevant guidance in SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. However, transactions that are normally accounted for as product sales should not be accounted for as long-term contracts merely to avoid the delivery requirements for revenue recognition normally 7. Service transactions—If, in addition to the obligation to deliver the software, the sales or licensing agreement includes obligations to perform services that (a) are not interdependent with the providing of a software product and (b) are separately stated and priced such that the total price of the agreement would be expected to vary as a result of the inclusion or exclusion of the services, the sales or licensing component and the services should be accounted for separately. If collectibility is probable, revenue from software services should generally be recognized as the services are performed or, if no pattern of performance is discernible, ratably over the period during which the services are performed. If significant uncertainty about customer acceptance of the services exists, revenue should not be recognized until the uncertainty is removed. 8. Postcontract customer support. If collectibility is probable, revenue from postcontract customer support (PCS), including revenue that is contractually bundled with initial licensing fees, should be recognized ratably over the term of the contract.

ISBN

ed91-01-16t

Publication Date

1991

Relational Format

Book

Keywords

Computer software industry -- Accounting -- Standards -- United States; Computer software industry -- Licenses -- United States -- Accounting; Revenue -- United States

Disciplines

Accounting | Taxation

Comments

Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants; Exposure draft (American Institute of Certified Public Accountants), 1991, Jan. 16

Proposed statement of position : software revenue recognition;Software revenue recognition

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