Issued by the accounting standards executive committee acsec, sop 972 provides guidance on applying revenue recognition principles to software transactions. 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. Sop 97 2 by clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. New guidelines for software revenue recognition practical. The accounting requirements within the standard have been modified by asu 2009 and asu 200914. Lpi software funding group leaders in the software. But a software application sold along with the hardware would still be under sop. Nusbaum in this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients. 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.
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. In october 1997, it issued a statement of position sop 972, software revenue recognition. Sop 97 2 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. Adjustments to sop 97 2 software revenue recognition. The statement splits software sales into two different categories. The 4 pillars of revenue recognition sop 972 and sab 104. For software companies, asc 606 brings change, guesswork. By clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. The new sop provides for prospective application of its guidelines for transactions entered into in fiscal years beginning after december 15, 1997. One of the difficulties lies in determining whether or not 972 applies.
Out of the box software this is prepackaged software that is sold to customers without any modifications. Nusbaum is a partner and national director of accounting and auditing for grant thornton llp. Modification of sop 972, software revenue recognition, with respect to certain transactions. 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. 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. Since the issuance of sop 911, practice issues had been identified that acsec believed had not been addressed adequately in the technical literature. 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. Software revenue recognition on the rise journal of accountancy. 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. Before sop 972 was issued, us gaap rules on software. Financial reporting developments software revenue recognition 1 1 introduction and scope 1.
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. 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. In october 1997, the aicpa issued statement of position sop 972, entitled software revenue recognition. The issue is whether nonsoftware deliverables included in an arrangement that contains software that is more than incidental to the products or services as a whole are included within the scope of sop 972. This guidance is codified in asc 985605, software revenue recognition.
Financial accounting standards board fasb revenue recognition. 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. Topic a provides the staffs views in applying generally accepted accounting principles to selected revenue recognition issues. The ultimate objective of attributing arrangement consideration is to determine when the arrangement consideration should be recognized as revenue. 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. Citeseerx document details isaac councill, lee giles, pradeep teregowda. This publication includes the appropriate references from the asc. In this position, he is responsible for all accounting and auditing policies and overseeing all technical matters for clients.
Key impacts of recent changes to revenue recognition standards. The institute has been working the kinks out of its recent sop 972, software revenue recognition. As a result, software products that are essential to the function of any nonsoftware products will also be. Revenue management and revenue recognition software.
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. 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. Think of the operating system on a pc, everything could be recognized on shipment. 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. Software companies continue to analyze the impact of the new revenue standard on their contracts, accounting policies, and financial statements. 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.
Accounting standards executive committee american institute of certified public accountants. Aicpa statement of position 972, software revenue recognition currently under topic 985 sop 972 sec staff accounting bulletin no. 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. 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.
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. Regain control with softrax revenue automation software and implement the new revenue recognition rules with confidence. Revenue recognition for software products with multiple. 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.
Sop 972 by clicking on the accept button, you confirm that you have read and understand the fasb website terms and conditions. Sop 972 superseded sop 911, also entitled software revenue recognition that had served as the previous guidance on the topic. One of the difficulties lies in determining whether or not 97 2 applies. The guidance in asc 985605 is applicable to transactions involving the licensing. Accordingly, the total amount of revenue was recognized upon delivery of the. The staff hereby adds new major topic, revenue recognition, and topic a, views on selected revenue recognition issues, to the staff accounting bulletin series.
Charlie will begin with a description and examples of the use of the four criteria pillars and how software and hardware currently have. To link to the entire object, paste this link in email, im or document. Change is definitely coming to the world of revenue recognition. 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. While sop 97 2 1 is fairly comprehensive, it obviously does not provide specific guidance for every software arrangement.
Revenue recognition software sop 972 wittsiepe consulting. Banking, finance and accounting business accounting accounting software computer services industry standards computer software industry financial software information technology services industry software industry. Citeseerx aicpa statement of position 972, software. Sop 972, software revenue recognition, provides guidance on when revenue should. 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. 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. These rules have ramifications to your companys financial well being, as well as for the timely booking and. We have prepared this publication to help you understand and apply the software revenue recognition. It specifies that revenue from an arrangement involving multiple elements should be. 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. 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. Aicpa statement of position 989, modification of sop 97 2, software revenue recognition, with respect to certain transactions paragraphs 68. 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.
Constructiontype and certain productiontype contracts aicpa. 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. 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. To embed the entire object, paste this html in website. American institute of certified public accountants. At the time of its issuance, sop 972 primarily applied to companies that sold software. The changing requirements of sop 972 software revenue recognition. New standards update sop 972 software revenue recognition. Software revenue recognition superseded by aicpa sop 911, software revenue recognition aicpa sop 911 was subsequently superseded by aicpa sop 972, software revenue recognition. Modification of sop 972, software revenue recognition. For software companies, asc 606 brings change, guesswork bi101. 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. 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.
This approach is intended to avoid accounting practices that might result in revenue being recognised too early. Makes things less strict, so that if the software is essential to the functioning of the hardware, its excluded from software revenue guidance. To link to this page, paste this link in email, im or document. 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. In most situations, the new guidance will result in earlier revenue recognition for financial reporting purposes. Jan 21, 2016 consult sop 97 2 for further guidance. Guide to the topic 606 revenue recognition model for all. Dmca constructiontype and certain productiontype contracts aicpa statement of position 972, software revenue recognition 2008. Softrax revenue management industry news 45 shawmut road canton, ma 02021 sales. This publication reflects implementation developments since issuance of the standards and highlights considerations relevant in evaluating the.
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. Accounting standards executive committee, software revenue recognition. If the hardware does not function without the license subscription, then ratable revenue recognition is required of both the hardware and subscription. The guidance of sop 972 is effective for software arrangements entered into in fiscal years beginning after december 15, 1997. 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. Renowned revenue recognition expert, tony sondhi, discusses the critical issues and implementation challenges facing companies as they prepare to adopt these new standards. Mar, 2012 as revenue recognition accounting changes, companies are spending more time and money to keep up. Revenue recognition for hardware deliverables in software arrangements. You can use the vsoe feature to determine vsoe prices of items and defer the recognition of this revenue.
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. Revenue recognition on software arrangements appendix c of sop 972 110 glossary from sop 972 1 appendix a multipleelement arrangements. As revenue recognition accounting changes, companies are spending more time and money to keep up. 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. It should be applied by all entities that earn such revenue. 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. Modification of sop 972, software revenue recognition, with. 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. Citeseerx constructiontype and certain productiontype.