Statement of position sop 972, software revenue recognition. 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. Financial reporting developments software revenue recognition 1 1 introduction and scope 1. Use this predefined template as a general guide for recognition of software revenue in accordance with sop 972, sab 104, and eitf 0021. Software is not revenuegenerating until it is shipped, so associated costs should be matched. The changing requirements of sop 972 software revenue recognition. In december 1991, the american institute of certified public accountants aicpa issued sop 911 entitled software revenue recognition. Sop 972 rules apply to companies selling software under any of these models.
For example in the tech industry, current software revenue recognition rules are rooted in sop 972 1997 and multiple deliverable rules were expanded in. Blackboard inc annual report 10k notes to consolidated financial statements. That may shift was the deliberation process continues. The challenges of improving revenuerecognition standard.
Sap can call you to discuss any questions you have. Software the primary authority for software revenue recognition is aicpa statement of position sop no. Revenue from the sale of packaged software products with specific upgrade rights is recognized in accordance with sop 972,software revenue recognition. As evidence that change is the only constant, sop 972 software revenue recognition has subsequently been modified again to adjust for changing. Accountancy archive 2020 2019 2018 2017 2016 2015 2014 20. I find that sop 972 implementation did not improve the contracting role of. The cost is expected to be recognized through june 20 with a weighted average recognition period of approximately 1. While we see the potential for improvement in calendar year 2010, we are unable to.
Statement of position sop 972, aicpa, new york, 1997 that removed software firms flexibility to. What is appropriate in terms of accounting for and recognising the revenue emanating from softwarerelated contracts. Until then we have asc 985605 to guide us through software revenue recognition. Accounting considerations for equity and revenue recognition. Applicability of aicpa statement of position 972 to. Revenue recognition accounting for software as a service. Kpmgs revenue recognition survey of technology companies the impact of adopting eitf 081 asu 2009 and eitf 093 asu 200914. Software vendors with a calendar year end would need to begin applying sop 972 to arrangements entered beginning january 1, 1998. Introduction overview in october 1997, the american institute of certified public accountants aicpa adopted a new set of guidelines for revenue recognition in software transactions. A calendar year end software vendor enters into a twoyear installment payment. Activities or transactions within the scope of sop 972, software revenue recognition section 10,700 f. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions.
The cost is expected to be recognized through february 20. Us standard statement of position sop 972, software revenue recognition. How to treat setup and implementation fees survey results included. It should be applied by all entities that earn such revenue. Software revenue recognition class software revenue recognition agenda, day two. As evidence that change is the only constant, sop 972 software revenue recognition has subsequently been modified again to adjust for changing business conditions. The subject of revenue recognition is dry stuff, but youll be helping your company and yourself if you are aware of some of the general rules relating to the accounting for revenue for software contracts. The case of software industrys adoption of sop 911. Until 1997, software firms had the freedom to report revenues using. Since the issuance of sop 972, us standard setters released a wide range of guidance over 50. Software revenue recognition on the rise journal of accountancy. Problems of accounting for revenue in the new economy.
It also highlights the most important provisions of gaap related to software 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. This standard is particularly important for two reasons. Sellingprice estimates in revenue recognition and the usefulness of. Revenue recognition for hardware deliverables in software. In sop 97 2 companies are given more guidance in applying. Since the issuance of sop 972, us standard setters released a wide range of guidance over 50 publications in all. Lpi software funding group leaders in the software. 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. New standards update sop 972 software revenue recognition. Sop 972, software revenue recognition, provides guidance on when revenue should be recognized and in. Software revenue recognition, as amended by sop 989, modification of sop 972, software. Particularly, i examine the setting of sop 972 aicpa in software revenue recognition. As we mentioned in yesterdays post, software companies tend to bundle together software licenses fees.
Software revenue recognition exposure revenue is a key factor in the valuation of a company. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and. Revenue recognition for hardware integrated with saas. Reconfiguring the scope of software revenue recognition guidance. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and. Accounting for equity is more complex than ever before. Overview of effects of vsoe of fair value on revenue recognition and measurement requirements 115. In sop 97 2 companies are given more guidance in applying the two general from it 595 at oxnard college. Revenue recognition for hardware integrated with saas and installation. Calendar year end public entities will be required to apply the standard for. However, for all other firms, the first fiscal year with transactions recorded using sop 972 ends in calendar year 1999. Blackboard inc quarterly report 10 q part i financial. Software companies affected by the transition to ifrs will need to manage the.
Banking, finance and accounting business accounting. Software companies and revenue recognition feature law. Revenue recognition timing and attributes of reported revenue. Revenue recognition software accounting automation sap. Products within the scope of emerging issues task force eitf issue no. 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. What follows is a summary of the current accounting guidance. While ias 18 addresses revenue recognition broadly, there is no parallel in ifrss to sop 972. Sop 972, software revenue recognition and staff accounting bulletin 104 sab 104. Sellingprice estimates in revenue recognition and the. The 4 pillars of revenue recognition sop 972 and sab 104.
Revenue recognition timing and attributes of reported. In fact, the most difficult area of revenue recognition may well be in software, which generally falls under the american institute of certified public accountants rules entitled, sop 972. 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. I investigated whether implementing sop 972, the revenuerecognition standard for the software industry, reduces earnings informativeness. Kpmgs revenue recognition survey of technology companies. Revenue recognition under multielement arrangements. Revenue recognition rules for bundled sales in high technology. 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. The accounting requirements within the standard have been modified by asu 2009 and asu 200914. 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. As a result of this fact companies are often pressed to recognize revenue as early as possible. Revenue recognition 5 step process silicon valley cpa. The company recognizes revenue from the delivery of data processing platform software when the software is delivered to and accepted by the customer, pursuant to asc topic 985, software.
It applies to both public companies according to sab 104 and private enterprises. Examples of restrictions could be calendar events a portion of the stock vests annually. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. The guidance of sop 972 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. Adjustments to sop 972 software revenue recognition. November 20 october 20 september 20 august 20 july 20. Revenue recognition on software arrangements appendix c of sop 972. Sop 911 mandates the deferral of software revenue until. 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. Financial reporting software industry and ias a hard landing for. Carmichael, software revenue recognition under sop 972, cpa j. Software revenue recognition under sop 972 the cpa journal. Revenue recognition for software companies softrax. This growth reflects recognition of deferred revenue from previously signed.
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