Revenue Recognition: Software (Portfolio 5103)

Bloomberg Tax Portfolio 5103-2nd, Starczewski, Fritz, and Rowe, Revenue Recognition: Software (Accounting Policy and Practice Series) explains and analyzes revenue recognition issues specific to the software industry. 

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Bloomberg Tax Portfolio 5103-2nd, Starczewski, Fritz, and Rowe, Revenue Recognition: Software (Accounting Policy and Practice Series) explains and analyzes revenue recognition issues specific to the software industry. The Portfolio includes an extensive analysis of the applicability and application of American Institute of Certified Public Accountants (AICPA) Statement of Position No. SOP 97-2, Software Revenue Recognition, as codified in ASC Topic 985, to software arrangements. It also includes a detailed discussion of the allocation of fees in multiple-element software arrangements. This discussion includes analysis of the rules applicable to additional software deliverables, postcontract customer support (PCS), and services other than PCS.
The Portfolio analyzes each of the four revenue recognition criteria, focusing on the issues that arise in arrangements that include software. The Portfolio also includes discussion of nonmonetary exchanges involving software and the application of contract accounting to software transactions.
The third in an anticipated subseries of portfolios on revenue recognition, this work augments 5100, Revenue Recognition: Fundamental Principles (Accounting Policy and Practice Series), and 5101, Revenue Recognition: Product Sales and Services (Accounting Policy and Practice Series).
This Portfolio may be cited as Bloomberg Tax Portfolio 5103-2nd, Starczewski, Fritz, and Rowe, Revenue Recognition: Software (Accounting Policy and Practice Series).


Lisa Marie Starczewski, Esq.

Lisa Marie Starczewski, J.D.(summa cum laude), Villanova University School of Law; B.A., (magna cum laude), Smith College. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987-88) and has practiced law with Morgan, Lewis & Bockius and Schnader, Harrison, Segal & Lewis. She taught at the Villanova University School of Law. Ms. Starczewski also has co- authored Bloomberg Tax Portfolios 5100, Starczewski, Mallek, and Beil, Revenue Recognition: Fundamental Principles; 5101, Starczewski, Beil and Mallek, Revenue Recognition: Product Sales and Services; 5114, Sebik. and Starczewski, Accounting for Leases: Fundamental Principles; 5117, Sebik, and Starczewski, Leases: Lessee Perspective; (Accounting Policy and Practice Series). She has also authored numerous Tax Management Portfolios (also published by us). Ms. Starczewski has received the Tax Management Distinguished Author Award and is a member of the Tax Management U.S. Income Advisory Board.

George P. Fritz, CPA

George P. Fritz, A.B. (magna cum laude), Xavier University. Mr. Fritz is a retired partner with
PricewaterhouseCoopers LLP. Since retiring in 1999, he has served as a consultant, primarily to professional accounting organizations, including the Public Oversight Board, the Panel on Audit Effectiveness, and the American Institute of Certified Public Accountants (AICPA). He was a member of the AICPA's Accounting Standards Executive Committee (AcSEC) from 1991 to 1996 and the Auditing Standards Board from 2004 to 2007. He chaired several AcSEC task forces, including one on software revenue recognition. Mr. Fritz also participated in the“Generally Accepted Accounting Principles” (GAAP) Codification project of the Financial Accounting Standards Board.

Mark S. Rowe, CPA

Mark S. Rowe, MBA, University of Texas; B.S. (Accounting) (cum laude), Ohio State University. Mr. Rowe has over 15 years of experience providing financial management to high growth public and private technology companies. He began his career in public accounting as a CPA with Arthur Young & Company and later with Peat, Marwick, Mitchell and Company. Since 1997, he has been a chief financial officer with Interim Management Services, LLC, Tatum CFO LLC, and, most recently, TLMI Corporation.

Table of Contents

Detailed Analysis

I. Introduction

A. Revenue Recognition - In General

1. Background

2. Scope of Portfolio

B. Nature of Software Transactions

C. Applicable GAAP Authority

1. SOP 97-2

2. EITF Issues

3. Technical Practice Aids

II. Software Revenue Recognition- In General

A. General Scope of Statement of Position No. 97-2

1. The "Incidental" Threshold

2. Non-Software Deliverables

3. Leases of Property, Plant, or Equipment and Software

4. Discounts on Subsequent Transactions

B. Application of SOP 97-2 to Different Types of Software Arrangements

C. Multiple-Element Arrangements

1. In General

2. Examples of Separate Software-Related Elements

3. Related Group of Contracts or Agreements

4. Hosting Arrangements

III. Allocating Fees in Multiple-Element Arrangements

A. General Rules - "Vendor-Specific Objective Evidence of Fair Value"

B. Special Rules Applicable to Additional Software Deliverables

1. Specified Upgrades/Enhancements

2. Additional Software Products

a. In General

b. Allocation - Price Per Copy Arrangements

c. Rights to Additional Software Products Treated as Subscriptions

C. Postcontract Customer Support (PCS)

1. Existence of PCS in Multiple-Element Software Arrangements

2. Allocation of Fee - Vendor Specific Objective Evidence of Fair Value (VSOE)

a. PCS Arrangements With Pre-Determined Renewal Rates

b. Perpetual License of Software With PCS

c. Short-Term Time-Based License of Software With PCS

d. Multi-Year Time-Based License of Software With Bundled PCS

e. PCS Renewal Arrangements With Consistent Renewal Percentages and Varying Renewal Amounts

f. Perpetual and Multi-Year Time-Based Licenses for the Same Product

g. Renewal of PCS Based on Users Deployed

h. Discounted License Fee With Bundled PCS

3. Contract Accounting and PCS-Related Services

4. Post-delivery Telephone Support

5. PCS Granted to Resellers

D. Services Other Than PCS

1. In General

2. Qualification of Service Element for Separate Accounting

E. More Than Insignificant Discounts

F. Usage-Based Fees

IV. Criteria for Recognizing Software Revenue

A. The Four Recognition Criteria

1. In General

2. Effect of License Term on Satisfaction of Recognition Criteria

3. Evidence of an Arrangement

a. In General

b. Side Agreements

4. Delivery

a. In General

b. Shipping Terms

c. Customer Acceptance

d. Multiple Copies of Software Products ("Site Licenses")

e. Multiple Licenses

f. License Mix

g. Delivery to an Intermediary/Agent or Intermediate Site

h. Bill and Hold

i. Effect of Authorization Codes or Keys

5. Fixed or Determinable Fee

a. In General

b. Effect of Extended Payment Terms

(1) In General

(2) Definition of "Concessions"

(3) Effect of Transfer of an Arrangement with Extended Payment Terms

c. Effect of Prepayments

(1) In General

(2) Software Company Participates in Financing Arrangements

(a) In General

(b) Interest Rate Buy-Downs

(c) Reseller Arrangements

d. Effect of Customer Financing

e. Effect of Customer Cancellation Privileges

(1) In General

(2) Fiscal Funding Clauses

f. Special Rules Applicable to Reseller Arrangements

6. Collectibility

B. Effect of Rights to Return or Exchange Software on Revenue Recognition

1. Evaluating Whether a Customer Right is a Right to Exchange, a Right of Return, or a Right to Additional Software Products

2. General Rules Related to Rights of Return

3. Platform-Transfer Rights

V. Nonmonetary Exchanges of Software

A. Nonmonetary Exchanges - In General

B. Nonmonetary Exchanges - Software

VI. Contract Accounting as Applied to Software Arrangements

A. Accounting for Revenue From Long-Term Contracts - In General

B. Software Contracts

1. In General

2. Choice of Method

3. Determining "Profit Centers"/Segmenting Contracts

4. Measuring Progress to Completion

a. In General

b. Input Measures

c. Output Measures

Working Papers

Working Papers


Worksheet 1 GAAP Hierarchy For Nongovernmental Entities, see Note below:

Worksheet 2 2007 Annual Report of BearingPoint Inc.

Worksheet 3 2007 Annual Report of Tektronix, Inc.

Worksheet 4 2007 Annual Report of Oracle Corporation

Worksheet 5 2007 Annual Report of Microsoft Corporation

Worksheet 6 2007 Annual Report of BMC Software, Inc.

Worksheet 7 2007 Annual Report of Oracle Corporation

Worksheet 8 2007 Annual Report of Accenture Ltd.



Federal Cases:

Financial Accounting Standards Board:

FASB Concepts Statements

FASB Statements of Financial Accounting Standards

FASB Technical Bulletins

FASB Proposals

FASB Projects

American Institute of Certified Public Accountants

Accounting Principles Board

Accounting Research Bulletins

Auditing Standards Board

Accounting Standards Executive Committee (AcSEC)

Emerging Issues Task Force

AICPA Audit Guides

AICPA Technical Practice Aids: (Nonauthoratative)

AICPA Audit Risk Alerts

Securities and Exchange Commission:

SEC Staff Accounting Bulletins (SAB):

SEC Accounting and Auditing Enforcement Releases

SEC Litigation Releases


Textbooks, Handbooks, Articles, and Speeches: