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This proposed Statement of Position (SOP) provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. This proposed SOP would supersede SOP 91-1, Software Revenue Recognition. This proposed SOP requires the following: 1. If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement should be accounted for in conformity with Accounting Research Bulletin No. 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, unless specified criteria for separate accounting for any service element are met. 2. Separate accounting for a service element of an arrangement to which contract accounting applies is required if both of the following criteria are met. a. The services are not essential to the functionality of any other element of the transaction. b. The services are stated separately in the contract such that the total price of the arrangement would be expected to vary as the result of inclusion or exclusion of the services. 3. If an arrangement to deliver software or a software system does not require significant production, modification, or customization of software, revenue should be recognized when all of the following criteria are met: a. Persuasive evidence of an agreement exists. b. Delivery has occurred. c. The vendor's fee is fixed or determinable. d. Collectibility is probable. 4. Software arrangements may consist of multiple elements, that is, additional software products, upgrades/enhancements, rights to exchange or return software, postcontract customer support (PCS), or services, including elements deliverable only on a when-and-if-available basis. If contract accounting does not apply, the vendor's fee must be allocated to the various elements based on vendor-specific objective evidence of fair values. If sufficient vendor-specific objective evidence of fair values does not exist, all revenue from the arrangement should be deferred until such sufficient evidence exists, or until all elements have been delivered. Exceptions to this guidance are provided for PCS, subscriptions, and arrangements in which the fee is based on the number of copies. Vendor-specific objective evidence is limited to (a) the price charged when the element is sold separately, or (b) if not yet being sold separately, the price for each element established by management having the relevant authority. 5. The portion of the license fee allocated to an element should be recognized as revenue when all of the revenue recognition criteria have been met. In applying those criteria, delivery of an element is considered not to have occurred if there are undelivered elements that are essential to the functionality of any delivered elements. Additionally, collectibility of that portion of the fee is not considered to be probable if the amount of the fees attributable to delivered elements is subject to forfeiture, refund, or other concession if the undelivered elements are not delivered. The provisions of this proposed SOP are effective for fiscal years beginning after December 15, 1996. Earlier application is encouraged. The cumulative effect of changes caused by adopting the provisions of this proposed SOP should be included in the determination of net income in conformity with Accounting Principles Board Opinion No. 20, Accounting Changes.
Computer software industry -- Accounting -- Standards -- United States; Computer software industry -- Licenses -- United States -- Accounting; Revenue -- United States
Accounting | Taxation
American Institute of Certified Public Accountants. Software Revenue Recognition Working Group, "Proposed statement of position : Software revenue recognition (To supersede SOP 91-1, software revenue recognition);Software revenue recognition (To supersede SOP 91-1, software revenue recognition)" (1996). Statements of Position. 621.