TPA 5100.41 states that a vendor could recognize revenue for amounts (related to an arrangement with
extended payment terms) received directly from customers (without the software vendor's participation in
its customers' financing arrangements) in advance of scheduled payments. In that example, the Vendor
should be able to recognize into revenue the first payment received at December 31, X1, assuming that
all other criteria have been met.
Vendor records revenue and subsequently determines amounts that will not be collected
The Vendor makes a determination at the outset of a sales arrangement that a fee is fixed or
determinable and records the appropriate amount of revenue upon delivery of the software (all revenue
recognition criteria have been met). A portion of the payments is not received when they become due
and, in a subsequent period the Vendor determines that some of the payments will not be collected.
Should the Vendor restate the previously recorded revenue on the basis that the revenue was improperly
recorded and an error had been made?
If the Vendor appropriately determined that the fees were fixed or determinable at the outset, and all other
revenue recognition criteria were met, the write-off of the receivable should be recorded as a bad-debt
charge in the period that it was determined that the amounts would not be collected. To the extent that
the product is returned, the reversal related to amounts not received charge should be recorded against
Extended payment terms — similarity of payment terms
The Vendor has been in business for 4 years and sells perpetual software licenses. The Vendor's
standard business practice is to extend the payment of the arrangement fee in equal installments over 3
or 5 years. Because of these extended payment terms, SOP 97-2, paragraph 28, indicates that the
arrangement fee is presumed not to be fixed or determinable (i.e., because a significant portion of the
software licensing fee is not due until more than twelve months after delivery of the software) and
revenue should be recognized as the payments from customers become due. This presumption can be
overcome if the Vendor can demonstrate that it has a standard practice of using long-term or installment
contracts and a history of successfully collecting under the original payment terms without making
concessions. The Vendor can demonstrate a history of successfully collecting under the original terms of
its 3 year arrangements without making concessions. Additionally, this arrangement is not viewed to be a
Can the Vendor overcome the presumption that the fees are not fixed or determinable for their 5 year
arrangements by successfully demonstrating a history of collecting under the original terms of their 3 year
arrangements without making concessions?
No. The AICPA Staff addressed the question in the Q&A's (TPA 5100.57). To overcome the presumption
that fees are not fixed or determinable in extended payment term arrangements, the Vendor must have a
history of successfully collecting under the original payment terms of comparable arrangements without
making concessions. Further, in evaluating a vendor's history, the historical arrangements should be
comparable to the current arrangement relative to terms and circumstances to conclude that the history is
relevant. Factors that should be assessed in this evaluation and include, among other factors, that in
order for the history to be considered relevant, the overall payment terms should be similar. Although a
nominal increase in the length of payment terms may be acceptable, a significant increase in the length of
the payment terms may indicate that the terms are not comparable. Accordingly, a history of successfully
collecting on 3 year arrangements without providing concessions is not sufficient to overcome the
presumption that a Vendor will provide concessions on its 5 year arrangements. In this case, the Vendor
would need to demonstrate a history of successfully collecting pursuant to the original payment terms on
comparable 5 year arrangements in order to overcome the presumption that the fees in its 5 year
arrangements are not fixed or determinable. However, such history is not available because the Vendor
has only been in business for 4 years.
Fixed or determinable — third-party financings
Consider the following scenarios, which depict different levels of involvement between the Vendor and the
Customer with regard to a financing arrangement. Assume that the Vendor has a history of granting
extended payment terms but does not have a history of making concessions.
The Customer arranges its own financing, the arrangement is not contingent upon the receipt of
financing, and the Vendor does not have any involvement in facilitating the financing process. (Scenario
The Customer requests extended payment terms and the Vendor refers the Customer to several third-
party financing agents who are known to finance deals for similar products. (Scenario 2)
The Vendor has a prearranged relationship with a third-party financing agent whereby customers of the
Vendor can receive financing at pre-negotiated rates and terms once their creditworthiness has been
ascertained. (Scenario 3)
The Vendor has a captive financing company that provides the financing. (Scenario 4)
How would each scenario affect the determination of whether the fee is fixed or determinable?
Because the software arrangement's payment terms are not extended, as contemplated in paragraph 28
of SOP 97-2, and the Vendor does not participate in the end-user customer's financing, the Vendor would
be able to recognize revenue upon delivery of the software product, provided all other requirements of
revenue recognition in SOP 97-2 are met. (TPA 5100.60)
While not quite as clear as Scenario 1, the fact pattern would generally support the assertion that the fee
is fixed or determinable, as long as the business reason for the desired payment structure is valid and
unrelated to future deliverables. (TPA 5100.64)
The nature of the business relationship between the parties (as much as their contractual obligations)
should govern the underlying assessment of whether the underlying fee is fixed or determinable. Factors
to consider in evaluating this scenario include, but are not limited to, the following:
What are the terms of the agreement between the Vendor and the third-party financing agent?
What are the ramifications for the Vendor if the Customer stops making payments to the third-
party financing agent due to financial difficulty or any other reason?
What are the ramifications for the Vendor if the Customer stops making payments to the third-
party financing agent due to a lack of satisfaction with the performance of the product or its
inability to purchase additional products from the Vendor?
Whether the Vendor has a history of providing concessions to financing parties or to customers to
facilitate or induce payment to the financing parties.
Given that the Vendor does have a history of collecting fees without making concessions, the use of a
captive financing company would not, by itself, preclude the Vendor from concluding that the fees are
fixed or determinable. Conversely, if the Vendor had no historical evidence of collecting fees without
making concessions for this type of receivable, revenue would be recognized as the payments became
due, as the fee would generally not be deemed fixed or determinable at the outset of the arrangement.
Fixed or determinable — third-party financing without recourse
The Vendor enters into an arrangement with the Customer on December 29, X1. The total fee in the
arrangement is $1,000,000. Of the total fee, $250,000 is due immediately. The remaining $750,000 is due
in installments as follows:
Payment Due Date
June 30, X2
December 30, X2
March 30, X3
All products due under the arrangement were delivered on December 29, X1. There are no products or
services deliverable in the future, and there are no updates expected by the Customer. The Vendor has a
limited history of utilizing extended payment terms, and therefore the Vendor cannot conclude that the
fees are fixed or determinable at the outset of the arrangement. However, management has never made
concessions in the past and has no intention of making them in this arrangement.
Assume that on June 29, X2, the Vendor factors the remaining fees to a third-party financing agent (the
"Agent"). The Agent bears all risk of collection for any reason, and the deal is nonrecourse to the Vendor.
Are the amounts received from the factoring recognizable as revenue when received?
The factoring of the remaining amounts due under the arrangement does not change the nature or the
structure of the transaction between the Vendor and the Customer (TPA 5100.58). Therefore, as the fees
were not considered fixed or determinable at the outset, the factoring has not changed that determination.
Revenue should be recorded when the original payment terms become due on June 30, X2,
December 30, X2, and March 30, X3.
Fixed or determinable — short-term returns
On September 30, the Vendor enters into an arrangement with the Customer for total fees of $500,000 to
license Product Z. Pursuant to the terms of the arrangement, the Vendor delivered Product Z on
September 30. The arrangement contains the following provision: "The Customer can return the product
for a full refund within 60 days after the completion of the installation." Assume that the Vendor generally
gives customers a 30-day period during which they can return the product for a refund but that the 30-day
clause generally is not linked to the completion of the installation. Additionally, the Customer's number of
users is substantially higher than that of the majority of the Vendor's other customers.
Are the fees under the arrangement fixed or determinable on September 30?
Despite the fact that the contract uses the word return, the essence of the clause is that this is a
cancellation privilege. Additionally, the linking of the "return" clause to installation may indicate some
uncertainty on the part of the Customer regarding the product's performance in the Customer's
environment. Lastly, the fact that the cancellation privilege cited in this clause is different from the return
right granted to other customers would be another indicator that the fees in the arrangement are not fixed
or determinable at the outset of the arrangement. As such, the $500,000 of revenue should be recognized
when the cancellation privilege lapses.
Most-favored nation clauses - prospective application
Vendor A enters into a contract with Customer B to provide software Product X. Customer B requests that
the contract include a clause stating that if Vendor A offers Product X at a lower price to any of its
customers, then Customer B will have the right to purchase additional Product X at the lower price.
Does the inclusion of this clause impact Vendor A's revenue recognition?
No. While "Most Favored Nation" clauses provide the customer with price protection for future price
decreases, the timing and amount of such price reductions are within the control of the vendor.
Accordingly such clauses would generally result in the vendor concluding that the arrangement's fee is
fixed or determinable.
Most-favored nation clauses - retrospective application
Assume the facts as set out in the example above.
Would the conclusion above differ if Vendor A has a history of providing retroactive price adjustments to
The most-favored nation clause could impact the revenue recognition. Consideration is needed as to
whether Vendor A: (1) can control the price at which it sells products to all of its customers under price
protection programs; and (2) can reliably estimate its price-protection obligation at the time of revenue
recognition. Refer to Chapter 7 for a further discussion of considerations related to price protection.
Fixed or determinable — payment dependent on delivery of additional product
On June 29, X2, the Vendor entered into a software agreement with the Customer. Pursuant to the terms
of the agreement, Product A and Product B were delivered on June 29, X2. Product C, which is not
currently deliverable, is scheduled for delivery on July 15, X2. The total fair value of the agreement and
the total fees are $1,000. VSOE of fair value (as discussed in Chapter 3) for the products is as follows:
The agreement contains a provision that if Product C is not delivered on or by July 15, X2, the Customer
will receive a refund of $200 against the fee of $1,000.
What is the appropriate revenue recognition?
Paragraph 14 of SOP 97-2 states, "No portion of the fee (including amounts otherwise allocated to
delivered elements) meets the criterion of collectibility if the portion of the fee allocable to the delivered
elements is subject to forfeiture, refund, or other concession if any of the undelivered elements are not
delivered." As such, no portion of the revenue for Products A and B that would be subject to forfeiture (in
the event that Product C were not delivered) can be recognized. Therefore, $800 ($1,000 total contract
value less $200 potential refund) would be recognized on June 29, X2. The $200 would be recognized
upon the delivery of Product C, if it is delivered by July 15, X2.
Penalties cannot be used to establish VSOE of fair value. In this scenario, VSOE of the fair value of the
undelivered element was known, and, since it was less than the potential penalty, the amount of the
penalty would need to be deferred. Under SOP 98-9, if VSOE of fair value of the undelivered products is
not known, revenue cannot be recognized.
Fixed or determinable — effect of business practices
The Vendor has recently announced a new software product. The Vendor's related marketing literature
advertises that the product includes significant enhancements of prior products and will operate in a new
operating environment that will make it more user-friendly. The Vendor's standard software arrangement
does not have contractual acceptance or rights-of-return provisions. However, the Vendor has a history of
delaying collections on licenses of new products, which appears to indicate that the customers were
evaluating the software to determine whether it met the advertised functionality. Additionally, the Vendor
accepts returns of new products if customers are not satisfied, and it has made concessions in the past.
Do the Vendor's business practices impact the determination of collectibility?
The Vendor's past practices may indicate that the software is being tested in the marketplace during the
product's initial release phase and that the fee is not fixed or determinable and collectible at the time of
shipment. Customers may have, in substance, a cancellation privilege. License revenue for all products
that are delivered during the initial phase should be deferred until (1) sufficient evidence exists that the
products will be accepted by the customers or (2) the Vendor no longer accepts returns, makes
concessions, or changes its collection practices for the product.
Vendor A enters into arrangements with two customers to deliver a modified version of its standard
The first arrangement includes customer acceptance provisions relating to standard performance criteria
which, under its license, Company X is able to reject the software if it uses more than a fixed amount of
memory to run.
The second arrangement includes customer acceptance provisions relating to standard performance
criteria which, under its license, Company Y is able to reject the software if it does not operate when
integrated with a new software product being developed by Company Y. The integration services do not
involve significant production, modification or customization of the software.
Assuming that all the criteria for revenue recognition other than related to acceptance have been met,
when can Vendor A recognize revenue under these two arrangements?
For the sale to Company X, Company A is able to demonstrate that in addition to meeting the published
specifications, it will run using less than the fixed amount of memory. Consequently, although the contract
has an acceptance provision, this can be seen to be a warranty under FAS 5 . As long as Vendor A can
estimate the amount of warranty obligation, it should recognize revenue on delivery of the software, with
an appropriate liability for probable warranty obligations.
For the sale to Company Y, Vendor A is not in a position to demonstrate that its software can be
successfully integrated with that of Company Y before shipment and, consequently, the customer
acceptance provision is substantive and is not overcome on shipment. Thus, no revenue can be
recognized until it can be demonstrated that Company Y has successfully integrated the software. This
would be best evidenced by formal customer acceptance, although other objective evidence may be
Fixed or determinable — customer acceptance and collectibility
The Vendor and the Customer enter into a software agreement pertaining to Product A. The Vendor's
standard license agreement contains the following provision: "The Customer has 30 days from delivery to
accept Product A. If the Customer does not accept Product A due to a defect in Product A, the Vendor
has 15 days to cure the defect in Product A." The Vendor is an established software company. Since the
introduction of Product A three years ago, there have been an extremely small number of situations in
which there has been a defect in Product A. In all of these limited situations, the defect was caused
during shipment, and the Vendor cured the defect by shipping a new Product A. No concessions have
been granted in relation to the acceptance provisions. Also, there have been no cases in the Vendor's
history in which Product A was not ultimately accepted by a customer.
Is the collection of fees probable upon the delivery of Product A?
Although all the facts and circumstances would have to be evaluated, particularly regarding the
Customer's computing environment and the number of users compared to the past customer base, it is
likely that the Vendor would be able to mitigate the uncertainty surrounding the stated acceptance clause
for fee collectibility and recognize revenue upon the delivery of Product A, assuming that all other
revenue recognition criteria have been met.
Fixed or determinable — additional time needed to cure defect and collectibility
Assume that the Vendor is a relatively new software company. Product A was introduced one year ago.
The Vendor has 25 customers. All customers are provided with a stated acceptance clause similar to the
one described in the example in section 2.3.3, and the Vendor has experienced some defects in Product
A. However, in all but two cases, the Vendor's service engineers have been able to fix the problem within
15 days, and the Customer ultimately accepted the product. In the two cases in which the problem had
not been fixed within 15 days, Product A was eventually accepted by the Customer, but the Vendor
committed to providing additional training days at no additional cost.
Is the collection of fees probable upon the delivery of Product A?
All the available evidence would have to be evaluated. Despite the fact that Product A has always
eventually been accepted, the fact pattern shows that the Vendor had to incur time and expense to cure
defects after the product's delivery and provide concessions to ensure acceptance. This presents reasons
for concern over the ability of the Vendor to record revenue upon the delivery of Product A.
Acceptance of Software linked to performance of services
The Vendor enters into an arrangement to sell the Customer software and services that are not essential
to the functionality of the software (e.g., training and installation) and would otherwise be accounted for
separately from the software. The arrangement includes an acceptance clause where the acceptance of
the software is linked to the Vendor's performance of the services.
How does the acceptance clause affect the accounting?
Since the Customer's acceptance of the services is generally viewed as a subjective right of return, the
Vendor should account for the customer acceptance provisions that are linked to the non-essential
services as a right of return under the provisions of FAS 48 .
Arrangements Involving Multiple Elements
A multiple-element software arrangement is any arrangement that provides the customer with the right to
software along with any combination of additional software deliverables, services, or postcontract
customer support (PCS), plus non-software deliverables considered to be within the scope of SOP 97-2
after applying the guidance in EITF 00-21 and EITF 03-05 (see Chapter 1). Unlike sales of many other
types of products in other industries, multiple elements are common in software arrangements because of
the nature of the industry — in particular with regard to future products, maintenance, and implementation
SOP 97-2 does not distinguish between significant and insignificant vendor obligations and stipulates
that, for revenue recognition purposes, when-and-if-available contract language must be considered
equivalent to an actual obligation to deliver a product. All future obligations, including additional software
deliverables that will be delivered only on a when-and-if-available basis, are considered elements to
which the arrangement fee should be allocated, based on the fair values of the individual elements as
discussed later in this chapter. This conclusion is based on the concept that if an undelivered element is
specifically mentioned in a contract, it must be an important factor in the customer's purchasing decision.
Revenue recognition for multiple-element arrangements is complicated and will vary with the nature of
each of the deliverables and how, if at all, each deliverable relates to or impacts another element. A
substantial portion of SOP 97-2 is dedicated to discussing the recognition of revenue for multiple-element
arrangements, and it is essential that vendors thoroughly understand the accounting for the various types
of arrangements. This chapter will discuss the following aspects of multiple-element arrangements:
3.1 Revenue recognition for multiple-element arrangements
3.2 Vendor-specific objective evidence
3.2.1 Residual method
3.2.2 Establishing VSOE of fair value
3.3 Postcontract customer support
3.3.1 General guidelines for recognition of PCS revenue
3.3.2 VSOE of fair value for PCS and other undelivered elements does not exist
3.3.3 PCS revenue is recognized with the initial license fee
3.3.4 Distinguishing between warranty obligations and PCS
3.4 Determining VSOE of fair value for PCS arrangements
3.4.1 Fair value of PCS in a short-term time-based license
3.4.2 Fair value of PCS in a multi-year time-based license
3.4.3 Fair value of PCS in perpetual and multi-year time based licenses
3.4.4 Coterminous PCS
3.4.5 Fair value of PCS with a consistent renewal percentage but varying renewal dollar amounts
3.4.6 PCS arrangements involving a maximum charge
3.4.7 PCS renewals based upon users deployed
3.4.8 Fair value of PCS with usage-based fees
3.5 Explicit versus implied PCS arrangements
3.6.1 PCS offered in arrangements involving significant customization or modification
3.7 Presentation and disclosure of product and services revenue
Documents you may be interested
Documents you may be interested