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AcSEC considered the FASB guidance contained above in FASB Concepts Statement No. 2 and
certain examples of transactions as presented above. AcSEC concluded that, although the best
evidence of fair value of an element is the price charged for that element when it is sold
separately, requiring deferral of recognition of revenue related to the delivered element when
there is sufficient other VSOE of fair value to support the allocation of the fee to the various
elements may be unduly conservative. Therefore, AcSEC concluded that the application of the
second sentences of paragraphs 10, 37, 41, and 57 of SOP 97-2 [section 10,700.10, .37, .41, and
.57] should be deferred for one year pending reconsideration by AcSEC.
.13 AcSEC notes that the requirement in the first sentence of paragraph 10 of SOP 97-2 [section
10,700.10] remains in effect during this deferral period, that is, revenues from a multiple-element
arrangement should be allocated to each element on the basis of its fair value. This allocation
principle is consistent with analogous provisions in other areas of accounting literature directed to
multiple-element arrangements. Paragraph 99 of SOP 97-2 [section 10,700.99] cites the
requirements of FASB Statement No. 45, Accounting for Franchise Fee Revenue, as one such
example. Another example is the consensus on FASB’s Emerging Issues Task Force (EITF)
Issue 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information Technology
Transformation, which requires allocation of third-party consulting costs to different activities
based on the relative fair values of the separate activities. A further requirement imposed by the
first sentence of paragraph 10 of SOP 97-2 [section 10,700.10] is that the amounts determined to
be fair value need to be supported by VSOE. The basis for such a conclusion is set forth in
paragraph 100 of SOP 97-2 [section 10,700.100].
.14 There may be situations in which VSOE of the fair value of each element does not exist. Not
all vendor-specific “evidence” is sufficiently objective and reliable to support a conclusion as to
the fair value of an element. For example, amounts set forth for software products on a published
price list may not represent customary sales prices. In the absence of representative selling
prices, VSOE may not exist.
.15 It is AcSEC’s intention to immediately begin a project to consider whether guidance is needed
on any restrictions that should be placed on VSOE of fair value and, if so, what that guidance
should be. Deferral of the second sentence of paragraph 10 of SOP 97-2 [section 10,700.10] will
allow AcSEC sufficient time to reconsider its conclusions. Positions of AcSEC are determined
through committee procedures, due process, and deliberation. Accordingly, this deferral should
not be construed as a conclusion that AcSEC will amend SOP 97-2 [section 10,700]. AcSEC
intends to complete its deliberations and, if determined appropriate, issue an SOP before the end
of 1998.
Effective Date
.16 SOP 97-2 [section 10,700] was issued on October 27, 1997, and is effective for transactions
in fiscal years beginning after December 15, 1997. This SOP is being issued before the end of
the earliest three-month period for which SOP 97-2 [section 10,700] must be applied.
Consequently, it is appropriate for this SOP to be effective upon issuance.
Transition
.17 Paragraph 92 of SOP 97-2 [section 10,700.92] prohibits retroactive application but
encourages early application as of the beginning of a fiscal year or interim period for which
financial statements or interim information have not been issued. AcSEC believes that permitting
entities that may have adopted the SOP early to restate previously issued financial statements or
information to reflect simultaneous adoption of SOP 97-2 [section 10,700] and this SOP will
improve comparability among reporting entities. AcSEC believes that very few, if any, entities will
be affected by the retroactive restatement provisions of this SOP.
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.18 Appendix – Response to Comments Received
A.1. On February 11, 1998, AcSEC issued an exposure draft of a proposed Statement of Position
(SOP), Deferral of the Effective Date of Certain Provisions of SOP 97-2, Software Revenue
Recognition, for Certain Transactions. The exposure draft proposed deferring the effective date of
the provisions of paragraph 10 of SOP 97-2 [section 10,700.10] with respect to what constitutes
vendor-specific objective evidence (VSOE) of fair value of the software element in multiple-
element arrangements in which:
a. A software element is sold only in combination with postcontract customer support (PCS)
or other service element(s) that qualify for separate accounting pursuant to SOP 97-2
[section 10,700], or both.
b. There is VSOE of the fair values of each of the service elements determined pursuant to
paragraphs 10, 57, and 65 of SOP 97-2 [section 10,700.10, .57, and .65].
A.2. None of the commentators on that exposure draft objected to deferral of the effective date of
paragraph 10 of SOP 97-2 [section 10,700.10] with respect to multiple-element arrangements
within the scope proposed in the exposure draft. A significant number of commentators were
concerned, however, about the implications of restricting the scope to only certain multiple-
element arrangements, and they urged AcSEC to broaden the scope to all multiple-element
arrangements.
A.3. As a result of AcSEC’s deliberations of the comment letters and examples of arrangements
brought to AcSEC’s attention, AcSEC:
a. Concluded that, for arrangements for which there is sufficient VSOE of the fair value of
each element, even if each element is not sold separately, the basis for deferral of
revenue recognition with respect to those elements that otherwise satisfied the criteria for
revenue recognition in SOP 97-2 [section 10,700] needs to be reconsidered. Accordingly,
AcSEC expanded the deferral to all arrangements discussed in paragraph .04 of this
SOP, not just those arrangements described in paragraph A.1. of this SOP.
b. Affirmed the requirement in SOP 97-2 [section 10,700] that any allocation of the fee in a
multiple-element arrangement to the various elements should be based on fair values of
each element and that such fair values must be supported by VSOE, thus reinforcing the
applicability of that requirement to all arrangements.
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27
Accounting Standards Executive Committee (1997-1998)
David B. Kaplan, Chair
James W. Ledwith
Mark M. Beilstein
Louis W. Matusiak, Jr.
James L. Brown
James P. McComb
Joseph H. Cappalonga
Charles L. McDonald
Robert O. Dale
Roger H. Molvar
Joseph F. Graziano
David M. Morris
James F. Harrington
Benjamin S. Neuhausen
Mark V. Sever
Software Revenue Recognition Working Group
George P. Fritz, Chair
H. John Dirks
Michele Axelson
Jerry Masters
AICPA Staff
Elizabeth A. Fender, Director
Frederick Gill, Senior Technical Manager
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31
Appendix C:
Statement of Position 98-9,
Modification of SOP 97-2, Software
Revenue Recognition, with Respect to
Certain Transactions
December 22, 1998
Issued by the Accounting Standards Executive Committee
American Institute of Certified Public Accountants
Note
Statements of Position on accounting issues present the conclusions of at least two-thirds of the
Accounting Standards Executive Committee, which is the senior technical body of the Institute
authorized to speak for the Institute in the areas of financial accounting and reporting. Statement
on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles, identifies AICPA Statements of Position that have been cleared
by the Financial Accounting Standards Board as sources of established accounting principles in
category b of the hierarchy of generally accepted accounting principles that it establishes. AICPA
members should consider the accounting principles in this Statement of Position if a different
accounting treatment of a transaction or event is not specified by a pronouncement covered by
Rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting
treatment specified by the Statement of Position should be used, or the member should be
prepared to justify a conclusion that another treatment better presents the substance of the
transaction in the circumstances.
Copyright © 1998 by American Institute of Certified Public Accountants, Inc., New York, NY
10036-8775
All rights reserved. For information about the procedure for requesting permission to make copies
of any part of this work, please call the AICPA Copyright Permissions Hotline at 201-938-3245. A
Permissions Request Form for emailing requests is available at www.aicpa.org by clicking on the
copyright notice on any page.
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Table of Contents
Paragraphs
Summary
Forward
Introduction and Background
1-4
Scope
5
Conclusions
6-8
Effective Date and Transition
9
Background Information and Basis for Conclusions
10-25
Effective Date and Transition
26-29
Due Process
30-31
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Summary
This Statement of Position (SOP) amends paragraphs 11 and 12 of SOP 97-2, Software Revenue
Recognition [section 10,700.11 and .12], to require recognition of revenue using the “residual
method” when (1) there is vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using long-term contract
accounting, (2) vendor-specific objective evidence of fair value does not exist for one or more of
the delivered elements in the arrangement, and (3) all revenue recognition criteria in SOP 97-2
[section 10,700] other than the requirement for vendor-specific objective evidence of the fair value
of each delivered element of the arrangement are satisfied. Under the residual method, the
arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as
indicated by vendor-specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 [section 10,700] and (2) the difference
between the total arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements.
Effective December 15, 1998, this SOP amends SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2, Software Revenue Recognition [section 10,740], to extend the deferral of
the application of certain passages of SOP 97-2 [section 10,700] provided by SOP 98-4 [section
10,740] through fiscal years beginning on or before March 15, 1999.
All other provisions of this SOP are effective for transactions entered into in fiscal years beginning
after March 15, 1999. Earlier adoption is permitted as of the beginning of fiscal years or interim
periods for which financial statements or information has not been issued. Retroactive application
of the provisions of this SOP is prohibited.
Forward
The accounting guidance contained in this document has been cleared by the Financial
Accounting Standards Board (FASB). The procedure for clearing accounting guidance in
documents issued by the Accounting Standards Executive Committee (AcSEC) involves the
FASB reviewing and discussing in public board meetings (1) a prospectus for a project to develop
a document, (2) a proposed exposure draft that has been approved by at least ten of AcSEC’s
fifteen members, and (3) a proposed final document that has been approved by at least ten of
AcSEC’s fifteen members. The document is cleared if at least five of the seven FASB members
do not object to AcSEC undertaking the project, issuing the proposed exposure draft, or after
considering the input received by AcSEC as a result of the issuance of the exposure draft, issuing
a final document.
The criteria applied by the FASB in their review of proposed projects and proposed documents
include the following.
1. The proposal does not conflict with current or proposed accounting requirements, unless
it is a limited circumstance, usually in specialized industry accounting, and the proposal
adequately justifies the departure.
2. The proposal will result in an improvement in practice.
3. The AICPA demonstrates the need for the proposal.
4. The benefits of the proposal are expected to exceed the costs of applying it.
In many situations, prior to clearance, the FASB will propose suggestions, many of which are
included in the documents.
Introduction and Background
.01 On October 27, 1997, the AICPA Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 97-2, Software Revenue Recognition [section 10,700].
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.02 Paragraph 10 of SOP 97-2 [section 10,700.10] states that, if an arrangement includes multiple
elements, the fee should be allocated to the various elements based on vendor-specific objective
evidence of fair value. Vendor-specific objective evidence of fair value is limited to the following:
a.
The price charged when the same element is sold separately; and
b.
For an element not yet being sold separately, the price established by management
having the relevant authority (it must be probable that the price, once established, will
not change before the separate introduction of the element into the marketplace).
.03 Paragraph 12 of SOP 97-2 [section 10,700.12] requires deferral of all revenue from multiple-
element arrangements that are not accounted for using long-term contract accounting if sufficient
vendor-specific objective evidence does not exist for the allocation of revenue to the various
elements of the arrangement.
.04 This SOP amends that guidance to require recognition of revenue in accordance with the
“residual” method in the limited circumstances described in paragraph .05 of this SOP.
Scope
.05 This SOP applies only to multiple-element arrangements in which (a) a software element or
other delivered element is sold only in combination with one or more other elements that qualify
for separate accounting pursuant to SOP 97-2 [section 10,700], (b) vendor-specific objective
evidence of fair value does not exist for one or more of the delivered elements, and (c) there is
vendor-specific objective evidence of the fair value of each of the undelivered elements
determined pursuant to paragraphs 10, 37, 57, and 66 of SOP 97-2 [section 10,700.10, .37, .57,
and .66].
Conclusions
.06 The following changes are made to SOP 97-2 [section 10,700].
a.
The following sentence is added to the end of paragraph 11 of SOP 97-2 [section
10,700.11].
Moreover, to the extent that a discount exists, the residual method described in
paragraph 12 [of SOP 97-2] attributes that discount entirely to the delivered elements.
b.
The following is added to the end of paragraph 12 of SOP 97-2 [section 10,700.12].
There may be instances in which there is vendor-specific objective evidence of the fair
values of all undelivered elements in an arrangement but vendor-specific objective
evidence of fair value does not exist for one or more of the delivered elements in the
arrangement. In such instances, the fee should be recognized using the residual
method, provided that (a) all other applicable revenue recognition criteria in this SOP
[SOP 97-2] are met and (b) the fair value of all of the undelivered elements is less than
the arrangement fee. Under the residual method, the arrangement fee is recognized as
follows: (a) the total fair value of the undelivered elements, as indicated by vendor-
specific objective evidence, is deferred and (b) the difference between the total
arrangement fee and the amount deferred for the undelivered elements is recognized
as revenue related to the delivered elements.
c.
The following example is added to appendix A of SOP 97-2 [section 10,700.146],
following “Multiple-Element Arrangements – Products and Services – Example 3.”
Multiple-Element Arrangements – Products and Services – Example 4
Facts:
A vendor sells software product A for $950. The license arrangement for product A always
includes one year of “free” PCS. The annual renewal price of PCS is $150.
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Revenue Recognition:
Assuming that, apart from the lack of vendor-specific objective evidence of the fair value of the
delivered software element, all applicable revenue recognition criteria in this SOP [SOP 97-2] are
met, revenue in the amount of $150 should be deferred and recognized in income over the one-
year PCS service period. Revenue of $800 should be allocated to the software element and
recognized upon delivery of the software.
Discussion:
Vendor-specific objective evidence of the fair value of the software does not exist because the
software is never sold separately. Consequently, sufficient vendor-specific objective evidence of
fair value does not exist for the allocation of revenue to the various elements based on their
relative fair values. Paragraph 12 of this SOP [SOP 97-2][section 10,700.12] states, however, that
the residual method should be used when there is vendor-specific objective evidence of the fair
values of all undelivered elements; all other applicable revenue recognition criteria in this SOP
[SOP 97-2] are met; and the fair value of all of the undelivered elements is less than the total
arrangement fee.
If there had been vendor-specific objective evidence of the fair value of the delivered software but
not of the undelivered PCS, the entire arrangement fee would be deferred and recognized ratably
over the contractual PCS period in accordance with paragraphs .12 and .58 [of SOP 97-2]
[section 10,700.12 and .58].
.07 Paragraph 5 of SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition [section 10,740.05], is replaced with the following:
The second sentences of paragraphs 10, 37, 41, and 57 of SOP 97-2 [section 10.700.10, .37,
.41, and .57] which limit what is considered VSOE [vendor-specific objective evidence] of the
fair value of the various elements in a multiple-element arrangement, and the related
examples noted in paragraph 3 of this SOP [SOP 98-4][section 10,740.03] need not be
applied to transactions entered into before fiscal years beginning after March 15, 1999.
.08 All provisions of SOP 97-2 [section 10,700] for software transactions outside the scope of this
SOP and all other provisions of SOP 97-2 [section 10,700] for transactions within the scope of
this SOP should be applied as stated in SOP 97-2 [section 10,700].
Effective Date and Transition
.09 The provisions of this SOP that extend the deferral of the application of certain passages of
SOP 97-2 [section 10,700] are effective December 15, 1998. All other provisions of this SOP are
effective for transactions entered into in fiscal years beginning after March 15, 1999. Earlier
adoption is permitted as of the beginning of fiscal years or interim periods for which financial
statements or information has not been issued. Retroactive application of the provisions of this
SOP is prohibited.
The provisions of this Statement need not be applied to immaterial items.
Background Information and Basis for Conclusions
.10 SOP 97-2, Software Revenue Recognition [section 10,700], was issued on October 27, 1997
and became effective for transactions entered into in fiscal years beginning after December 15,
1997, with earlier application encouraged.
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.11 Paragraph 10 of SOP 97-2 [section 10,700.10] provides that, if a software arrangement
includes multiple elements, the fee should be allocated to the various elements based on vendor-
specific objective evidence of fair value. Paragraph 12 of SOP 97-2 [section 10,700.12] provides
that, if sufficient vendor-specific objective evidence of fair value does not exist for the allocation of
revenue to the various elements of the arrangement, all revenue from the arrangement should be
deferred.
.12 Paragraph 10 of SOP 97-2 [section 10,700.10] establishes only two conditions that constitute
vendor-specific objective evidence of fair value. Neither of those conditions allows for the
determination of the fair value of an element of a multiple-element arrangement that is never sold
separately. A consequence of not having separate sales of one or more elements under SOP 97-
2 [section 10,700], as issued, is that all revenue from such an arrangement would be deferred in
accordance with paragraph 12 of SOP 97-2 [section 10,700.12].
.13 In developing the “unbundling” guidance in SOP 97-2 [section 10,700], AcSEC deliberated the
need for verifiable fair values of each of the elements. AcSEC did not support permitting
allocation of the sales price of the package of elements to the individual elements using
differential measurement, in which an amount to allocate to an element for which there is no
separate vendor-specific objective evidence of fair value is inferred by reference to the fair values
of elements for which there is vendor-specific objective evidence of fair value and the fair value of
the total arrangement.fn1 AcSEC was concerned that, under differential measurement, any
difference between the fair values of the individual elements when sold separately and the fair
value of the elements when sold as a package (that is, a discount) would be allocated entirely to
undelivered elements, possibly resulting in a significant overstatement of reported revenue in the
period in which the software is delivered.
.14 In arriving at its conclusion in SOP 97-2 [section 10,700], AcSEC did not deliberate situations
in which software or other delivered elements would always be sold with one or more services or
other undelivered elements that qualify for separate accounting. In such situations, there could be
vendor-specific objective evidence of the fair value of the undelivered elements when sold
separately (for example, by reference to renewal PCS or to the price for user training that is sold
separately). Application of the conclusions in paragraph 10 of SOP 97-2 [section 10,700.10],
however, would have resulted in a determination that there was not vendor-specific objective
evidence of the fair value of the delivered element (for example, software). The provisions in
paragraph 12 of SOP 97-2 [section 10,700.12] would have required the initial deferral of all
revenue from such arrangements.
.15 Subsequent to the issuance of SOP 97-2 [section 10,700], some AcSEC members came to
believe that it is inappropriate to defer all revenue from the arrangement in such situations,
because the use of the residual method would result in allocation of any discount entirely to the
delivered element. Thus, there would be no potential for overstatement of revenue at the time of
initial delivery of the software element. Indeed, it had been argued that recognizing no revenue
from the delivered software element in such circumstances would inappropriately understate
reported income.
.16 AcSEC considered this matter in light of paragraphs 95 and 96 of Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Concepts No. 2, Qualitative
Characteristics of Accounting Information. Those paragraphs state the following:
Conservatism no longer requires deferring recognition of income beyond the time that
adequate evidence of its existence becomes available or justifies recognizing losses before
there is adequate evidence that they have been incurred.
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