Includes online accounting software, enterprise resource planning erp. At the time of its issuance, sop 972 primarily applied to companies that sold software. 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 impact of the new rule for a softwareasaservice saas company like. Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions.
Accelerate software license revenue recognition flexera. Software revenue recognition class software revenue recognition agenda, day two. 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. Software the primary authority for software revenue recognition is aicpa statement of position sop no. Revenue recognition for software companies softrax industry. 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. 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. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable. Software revenue recognition under sop 972 by carmichael. A comprehensive guide software revenue recognition. To link to this page, paste this link in email, im or document. Sop 972 refers to arrangements in which software vendors bundle their software products with myriad services or other products as multipleelement. 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.
Revenue wreckognition how a tax rule killed a saas deal. Softrax resource center revenue management resources. Software revenue recognition rules and postcontract. To link to the entire object, paste this link in email, im or document. 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. 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. The costs of revenue recognition as revenue recognition accounting changes, companies are spending more time and money to keep up. The initial discussion will enable you to understand the background and the impact of revenue recognition. New revenue recognition rule is tricky for software and. Software licensing is generally treated for accounting purposes as a sale or licensing of a product. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue. New guidelines for software revenue recognition practical. Regulations new revenue recognition rule is tricky for software and technology companies.
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. Key complications however, saas companies often cant satisfy those fasb criteria. 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. This guidance is codified in asc 985605, software revenue recognition. Aicpa statement of position 972, software revenue recognition, was issued in an era when software. Statement of position 972 continues to help financial statement preparers. Additional guidance on allocating among elements may be found in sop 811, paragraphs 35 through 42. The new standard not only changes financial statement. Saas is different an accounting primer for saas companies.
Saas revenue recognition concepts guide saas addict. This guidance is codified in asc 985605, software e revenue recognition. 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. 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. 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. Senior accountant revenue recognition jobs, employment. Jun 29, 2015 our latest survey of saas companies reveals two compelling shifts in revenue recognition. 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 result is that several ifrs reporting companies e. 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. Sop 972, software revenue recognition, as codified in asc topic 985, to software. Software licensing versus saas the revenue and cost recognition rules that different than the accounting rules that software licensing companies employ. What was not clear was how bright lines would blur for companies outside of the traditional software.
Products within the scope of emerging issues task force eitf issue no. Applicability of aicpa statement of position 972 to certain. Software revenue recognition has not gotten easier. May 09, 2011 for a little backdrop, in the united states, the rules for software revenue recognition are generally defined in the american institute of certified public accountants aicpa statement of position sop 972 and, for publicly traded companies, in sec staff accounting bulletin. The basics at the most basic, under asc 6051025, revenue is. Revenue recognition for saas businesses is inherently complex, and depends on your specific revenue model. 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. Revenue recognition literature sop 972 and 989 sab 101 and 104 tpas aicpa technical practice aids eitfs 003, 0021, 035. New standards update sop 972 software revenue recognition. This presentation shows how a company can use saas for revenue recognition either as a software or service. 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. 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.
In this paper, the pricewaterhousecoopers pwc global software practice examined certain situations in which adopting ifrs may require a reconsideration of revenue recognition. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. 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. Jun, 20 a very openended question kind of similar to what is the best flavor of ice cream.
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. The staff is providing this guidance due, in part, to the large number of revenue recognition. Fasb staff document revenue recognition potential changes. Generally, for revenue recognition, software licensing companies can recognize a significant portion of the arrangement fee when the software. The changing requirements of sop 972 software revenue recognition. The complete guide to saas revenue recognition with asc 606. Kpmgrs evenue recognition survey of technology companies. 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. Modification of sop 972, software revenue recognition, with respect to certain transactions. Activities or transactions within the scope of sop 972, software revenue recognition section 10,700 f. While the basis for software license revenue recognition is substantially governed by the provisions of statement of position no. If fair value has not been established on each element, then all revenue. 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. Everything you need to know about vsoe but are afraid to ask paul lamparski finance director, global revenues.
Revenue recognition accounting for software as a service saas. 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. If fair value has not been established on each element, then all revenue needs to be deferred until the contract is complete. Financial reporting developments software revenue recognition 1 1 introduction and scope 1. Applicability of aicpa statement of position 972 to. The statement splits software sales into two different categories. 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. Software revenue recognition rules and postcontract support.
Financial reporting developments software e revenue recognition iii 1 introduction and scope 1. Citeseerx document details isaac councill, lee giles, pradeep teregowda. Revenue recognition on software arrangements appendix c of sop 972. The same is true for other substantial mixes that include intangible asset software and. 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. Understand, apply and update your knowledge of the changing practices of revenue recognition. Experience with software revenue recognition and subscription billing. That being said, my read of your question implies to me your company is not saas, but regular sop 97 2 software.
As set forth in concepts statement 5, paragraph 83, recognition. 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 by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software. Revenue recognition accounting for saas software as a.
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. 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%. Areas for investor scrutiny on revenue recognition changes. Revenue recognition software accounting automation sap. 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 softwareasa service saas. In october 1997, the aicpa issued statement of position sop 972, entitled software revenue recognition.
The guidance in asc 985605 is applicable to transactions involving the licensing. 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. Citeseerx constructiontype and certain productiontype. 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. From a bookkeeping perspective, your company will no doubt maintain numerous detailed accounts to accurately track specific assets, liabilities, revenue streams and cost centers. Accounting standards executive committee, software revenue recognition. 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 staff accounting bulletin summarizes certain of the staffs views in applying generally accepted accounting principles to revenue recognition in financial statements. To embed the entire object, paste this html in website. Citeseerx aicpa statement of position 972, software. Due to the increased prevalence of the software as a service 2 saas. Banking, finance and accounting business law computer software industry accounting and auditing industry sales and revenue marketing software industry. The company follows financial accounting standards board fasb accounting standards codification asc 985. Kpmgs revenue recognition survey of technology companies. 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. Out of the box software this is prepackaged software that is sold to customers without any modifications.
Trg the iasb and the fasbs joint transition resource group for revenue recognition. 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. 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. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. Application of aicpa statement of position sop 972, software revenue recognition. 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. But at the managerial level, what should an effective subscription revenue income statement. 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. Created to influence the development of accounting standards and guidance, it was the 103rd statement issued by the aicpa. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry.
The statement was released due to changing business models within the software industry and was known as sop 972 software revenue recognition. Eitf 0801, fasb revenue recognition adoption best practices. Revenue recognition is a generally accepted accounting principle gaap and a fundamental aspect of the accrual basis of saas. The ultimate objective of attributing arrangement consideration is to determine when the arrangement consideration should be recognized as revenue. The new saas revenue recognition standard has finally been issued, and now the real work begins. For most software accounting departments, it became the bane of their existence. All of the methods of allocating revenue in those sops, including the residual method discussed in sop. It applies to both public companies according to sab 104 and private enterprises. The issue is whether non software deliverables included in an arrangement that contains software.
Revenue recognition accounting for software as a service. 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. Under existing guidance, customer acquisition costs for saas providers. The new sop provides for prospective application of its guidelines for transactions entered into in fiscal years beginning after december 15, 1997.
Revenue recognition for software companies softrax. Accounting for the costs of computer software to be sold, leased, or otherwise marketed asc 985605. Implementation of current and new accounting standards. The new guidance standardizes how companies should recognize revenue under u. The guidance of sop 972 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. Simplify complex accounting processes with highlyconfigurable revenue recognition and accounting automation software. Gaap codification of accounting standards guide by. 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 portfolio includes an extensive analysis of the applicability and application of american institute of certified public accountants aicpa statement of position no. The right way to recognize revenue journal of accountancy.
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