It should be applied by all entities that earn such revenue. In this quick session we cant possibly address all of the literature, but i am going to begin with a brief discussion of the applicability of sop 972. Citeseerx constructiontype and certain productiontype. The current gaap standards for cloud and saas software companies, sop 972 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for 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 arrangements. New guidelines for software revenue recognition practical. To link to the entire object, paste this link in email, im or document. For software companies, asc 606 brings change, guesswork. Nusbaum in this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients. Think of the operating system on a pc, everything could be recognized on shipment. The new sop provides for prospective application of its guidelines for transactions entered into in fiscal years beginning after december 15, 1997.
Aicpa statement of position 989, modification of sop 97 2, software revenue recognition, with respect to certain transactions paragraphs 68. Sop 972 has been modified by the issuance of sop 984, deferral of the effective date of a provision of sop 972, software revenue recognition and sop 989, modification of sop 972, software revenue recognition, with respect to certain transactions. Charlie will begin with a description and examples of the use of the four criteria pillars and how software and hardware currently have different rules. In most situations, the new guidance will result in earlier revenue recognition for financial reporting purposes.
Additionally, while some argue that sop 97 2 is too rules based, i believe that there are certain principles that can be applied and that the standard. The guidance in asc 985605 is applicable to transactions involving the licensing. The vsoe feature is intended for use by united states companies to maintain gaap compliance with the american institute of certified public accountants aicpa statement of position 972 sop 972 and sop 989 the residual method. Adjustments to sop 97 2 software revenue recognition. Revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. To link to this page, paste this link in email, im or document. Sop 972 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the. This publication includes the appropriate references from the asc. As a result, software products that are essential to the function of any nonsoftware products will also be. Revenue recognition for selling hardware plus software.
As set forth in concepts statement 5, paragraph 83, recognition involves consideration of two factors, a being realized or realizable and b being earned, with. Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions. Aicpa statement of position 911, software revenue recognition sop 911 aicpa statement of position 972, software revenue recognition sop 972 sec staff accounting bulletin no. Makes things less strict, so that if the software is essential to the functioning of the hardware, its excluded from software revenue guidance. 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.
The effective date for topic 606, revenue from contracts with customers, is now here for all entities. When no modifications are necessary, revenue can be recognized when a contract exists, it is delivered, price is determinable, and revenue is collectable. Renowned revenue recognition expert, tony sondhi, discusses the critical issues and implementation challenges facing companies as they prepare to adopt these new standards. One of the difficulties lies in determining whether or not 972 applies.
Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas. In this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients. Financial reporting developments software revenue recognition 1 1 introduction and scope 1. Nov 07, 2016 secs statement of postion sop 972, software revenue recognition and sop 989, software revenue recognition with respect to certain transactions, applied to all entities that license, sell, lease or market computer software. Revenue management and revenue recognition software. Aicpa sop 972, software revenue recognition aicpa sop 984, deferral of the effective date of a provision of sop 972, software revenue recognition aicpa sop 989, modification of sop 972, software revenue recognition, with respect to certain transactions aicpa sop 002, accounting by producers or distributors of films. For those in the technology sector that follow statement of position 972, software revenue recognition sop 972 for revenue recognition, adopting topic 606 will most likely result in significant changes in how you recognize revenue. Financial accounting standards board fasb revenue recognition. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. In october 1997, the aicpa issued statement of position sop 972, entitled software revenue recognition.
Jan 21, 2016 consult sop 97 2 for further guidance. 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 contained in sop 972. Guide to the topic 606 revenue recognition model for all. American institute of certified public accountants. Software revenue recognition on the rise journal of accountancy. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. The institute has been working the kinks out of its recent sop 972, software revenue recognition. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and. 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. In this quick session we cant possibly address all of the literature, but i am going to begin with a brief discussion of the applicability of sop 97 2. Accounting standards executive committee, software revenue recognition. This approach is intended to avoid accounting practices that might result in revenue being recognised too early. Feb 07, 2017 the current gaap standards for cloud and saas software companies, sop 97 2 and asc 985, will soon be obsoleted in favor of asc 606, which is the new gold standard for 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. Sop 972, software revenue recognition, provides guidance on when revenue should. Revenue recognition for hardware deliverables in software arrangements. Aicpa statement of position 972, software revenue recognition, was issued in an era when software was not embedded in as many products as is now the case and has rapidly become out of date. As revenue recognition accounting changes, companies are spending more time and money to keep up. Change is definitely coming to the world of revenue recognition. Indeed, prior to sop 972, many software companies recognized revenues on their contracts by using a criticalevent approach. New eitf revenue recognition standards for multiple. We have prepared this publication to help you understand and apply the software revenue recognition. Secs statement of postion sop 972, software revenue recognition and sop 989, software revenue recognition with respect to certain transactions, applied to all entities that license, sell, lease or market computer software. First, fasb gave acsec the goahead to issue sop 984, deferral of the effective date of a provision of sop 972, which deferred for one year certain portions of the sop covering multipleelement arrangements. Companies that sell software products and services that are not incidental to the products or services as a whole will generally need to follow the procedures under aicpa statement of position sop 972, software revenue recognition.
Modification of sop 972, software revenue recognition, with. The 4 pillars of revenue recognition sop 972 and sab 104. The changing requirements of sop 972 software revenue recognition. Mar, 2012 as revenue recognition accounting changes, companies are spending more time and money to keep up. 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. Accordingly, the total amount of revenue was recognized upon delivery of the. Topic a provides the staffs views in applying generally accepted accounting principles to selected revenue recognition issues. Key impacts of recent changes to revenue recognition standards. New standards update sop 972 software revenue recognition.
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. Modification of sop 972, software revenue recognition. At the time of its issuance, sop 972 primarily applied to companies that sold software. Citeseerx aicpa statement of position 972, software. The ultimate objective of attributing arrangement consideration is to determine when the arrangement consideration should be recognized as revenue. Regain control with softrax revenue automation software and implement the new revenue recognition rules with confidence.
These rules have ramifications to your companys financial well being, as well as for the timely booking and. Out of the box software this is prepackaged software that is sold to customers without any modifications. Constructiontype and certain productiontype contracts aicpa. Revenue recognition for software products with multiple.
The guidance of sop 972 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. Lpi software funding group leaders in the software. Revenue recognition software sop 972 wittsiepe consulting. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements.
Software revenue recognition superseded by aicpa sop 911, software revenue recognition aicpa sop 911 was subsequently superseded by aicpa sop 972, software revenue recognition. Charlie will begin with a description and examples of the use of the four criteria pillars and how software and hardware currently have. Aicpa statement of position 972, software revenue recognition currently under topic 985 sop 972 sec staff accounting bulletin no. Since the issuance of sop 911, practice issues had been identified that acsec believed had not been addressed adequately in the technical literature. Sop 97 2 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. If the hardware does not function without the license subscription, then ratable revenue recognition is required of both the hardware and subscription.
Where delivery of a software product is involved per revenue recognition guidance under asc 985605 earlier sop 972, software revenue recognition a customer gets a beta version i. The staff hereby adds new major topic, revenue recognition, and topic a, views on selected revenue recognition issues, to the staff accounting bulletin series. This guidance is codified in asc 985605, software revenue recognition. But a software application sold along with the hardware would still be under sop. Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas software companies will have to. Asc 606 does simplify and streamline a number of revenue recognition complexities, but it also introduces a few more judgments calls, which cloud and saas software companies will have to get used to. Dmca constructiontype and certain productiontype contracts aicpa statement of position 972, software revenue recognition 2008. For those in the technology sector that follow statement of position 972, software revenue recognition sop 972 for revenue recognition, adopting topic 606 will most likely result in significant changes in how you. Sop 972 by clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. Accounting standards executive committee american institute of certified public accountants. Software revenue recognition 5 recognised, even if all other revenue recognition criteria have been met and the lack of signature is due solely to administrative formalities extraneous to the negotiations between the parties. To embed the entire object, paste this html in website.
Citeseerx document details isaac councill, lee giles, pradeep teregowda. You can use the vsoe feature to determine vsoe prices of items and defer the recognition of this revenue. Modification of sop 972, software revenue recognition, with respect to certain transactions. Jun 03, 2015 in this webinar charlie hodgin, technical revrec consultant at, will discuss the foundational concepts of revenue recognition and how they relate to software sales vs. Sop 97 2 by clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. Nusbaum is a partner and national director of accounting and auditing for grant thornton llp. Before sop 972 was issued, us gaap rules on software. One of the difficulties lies in determining whether or not 97 2 applies. As evidence that change is the only constant, sop 97 2 software revenue recognition has subsequently been modified again to adjust for changing business conditions. 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.
The financial accounting standards boards emerging issues task force eitf recently updated guidance regarding recognition of revenue for multiple deliverable arrangements, which is intended to better reflect the underlying economics of such arrangements. Softrax revenue management industry news 45 shawmut road canton, ma 02021 sales. In october 1997, it issued a statement of position sop 972, software revenue recognition. The statement splits software sales into two different categories. While sop 97 2 1 is fairly comprehensive, it obviously does not provide specific guidance for every software arrangement.
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