Key Impacts of Recent Changes to Revenue Recognition Standards

What you need to know as a software company

In June of 2014, the Financial Accounting Standards Board, together with the International Accounting Standards Board, issued a new revenue recognition standard that replaces all current industry-specific revenue recognition rules with a single principle-based model. The resulting change is most significant to software companies because of the elimination of the current, relatively restrictive revenue recognition standard for software companies that has been in place since 1997 (SOP 97-2). Revenue is among the most critical amounts reported in the financial statements of software companies, and the impact of the new standard will go far beyond accounting. Below is a summary of significant provisions of the new revenue recognition standard that will impact software companies.

VSOE No Longer Required: Software companies are no longer required to obtain vendor-specific objective evidence (VSOE) of fair value for undelivered elements in order to recognize revenue.

Revenue Allocated based on Stand-Alone Selling Price: Under the new standard, revenue is allocated to separate performance obligations (i.e. deliverables or elements) based on the stand-alone selling price of each obligation. When stand-alone selling prices do not exist, management must use an estimated selling price.

Variable Consideration Recognized based on Expected Amount: Revenue on contracts with variable or contingent consideration will be recognized based on management’s estimate of the amount that the company expects to be entitled to receive. Amounts will no longer need to be fixed and determinable to recognize revenue.

Costs to Obtain a Contract Must be Capitalized: Costs incurred as a result of obtaining contracts (e.g. sales commissions) must be deferred and recognized over the term of the contract.

Recognition of Revenue from Technology Licensing Arrangements: Vendors will recognize revenue from technology licensing arrangements immediately if the vendor has no continuing involvement, or over the term of the agreement if the vendor has continuing involvement with the technology.

With a team of professionals that have a tremendous amount of experience working with over 200 public and private software companies, Aprio can help you adequately assess the impact of the new revenue recognition standard beyond the accounting department. This will enable you to educate your audit committee, satisfy your auditor and give you sufficient time to appropriately plan for its adoption.