The new revenue standards asc 606 and ifrs 15, revenue from. However, software entities may reach different conclusions under ifrs 15 about which goods or services can be accounted for separately and the consideration that needs to be allocated to. Asacicbv business valuation conference deferred revenue. Depending on your business model, you may need to discount the license cost deeply, but can still get the list price for maintenance. An entity that does not have vsoe of fair value for the. Vsoe revenue recognition is commonly used by companies that sell software products and services in multipleelement bundles. Detailed rules on software license revenue recognition bi101.
Why vendors resist negotiating software maintenance fees. Vsoe of fair value for maintenance is established using the stated maintenance renewal rate in the customers contract. This research byte analyzes why maintenance fees are. The complete guide to saas revenue recognition with asc. With a mature product, where you already have established vsoe for maintenance, typically 15 20% of license fee, my experience is that the normal mix of revenue is 20% maintenance, 5 10% professional services and the balance license fees. Software companies will no longer need to establish vsoe in order to recognize revenue separately for different components of a contract. Now, if you are talking sop 811, then all bets are off in the above split. If the vendor cannot establish vsoe of fair value, it may have to defer recognizing all revenue until the last element in the contract is delivered.
Vsoe is the price the company charges when selling the same product separately. Software maintenance is a part of software development life cycle. Its main purpose is to modify and update software application after delivery to correct faults and to improve performance. An annual charge of 20% of the license fee list price is a good staring place. As we noted previously, sop 972 software revenue recognition defines vsoe of fair value as the price charged when the same element is sold separately. Sales agreements that bundle software, hardware, maintenance, and professional services or that deliver ongoing saas offerings have increasingly become the norm in the hightech industry. Sop 972, which governs how companies that sell software recognize the revenue.
For example, if a services statement of work is deemed to be linked to a software license and maintenance and there is a lack of vsoe on the services, the license fees are deferred andor the license fees would be carved out if the services rates that. In separate publications fasb and ifrs issued new guidelines on how companies headquartered in the usa account for the purchase of subscriptionsaas software and. For term licenses with duration of one year or less, no vsoe of fair value. High software maintenance fees and what to do about them software maintenance fees pay for two services from the vendor to the customer. Software companies will no longer need to establish vsoe in order to. Vsoe as embedded software becomes an increasingly essential element in traditionally nonsoftware sectors consider cell phones, medical devices, computer networks, even cars with gps services, etc. Forget the industryspecific guidance youve used before and prepare to make. Terms the license usually contains some sort of period of service, usually expressed in time hours, weeks, months, years, perpetuity, etc. A study in software maintenance sei digital library. As technology becomes further entrenched in consumer and enterprise products, companies outside of the traditional software. New revenue guidance implementation in the software industry.
It has a very specific usage and applies only to the software industry in the cases that the delivery of a project can be traced to certain deliverables. Vsoe calculation using the bell curve approach bi101. The vsoe unit is responsible for payment of the installation of power circuits if the existing power circuits are unavailable or inadequate. This report presents the results of interviews between case environments project team members and personnel in eight software maintenance projects within an agency of the u. However, if sufficient vsoe does not exist for the allocation of revenue to the. Software maintenance sustains the software product throughout its life cycle from development to operations. Revenue recognition within the software industry has historically been highly complex with much industryspecific guidance. Software maintenance, on the other hand, normally is recognized ratably as the maintenance period elapses.
Significant judgment is required in assessing a software license against the two requirements. The sop provides instruction on recognition for licensing, selling, leasing or otherwise marketing software. With a highly variable or uncertain standalone selling price, the residual approach may be used if at least one of the following two conditions in asc 606. The theory, broadly speaking, is that you shouldnt recognize revenue until youve completed the earnings process for that revenue. If youre tempted to stop reading now because your company isnt in the software business dont. I am not sure whether analysis plays a big part to your question, but i can explain why vsoe is used in the software industry and what you should manipulate as one goes through the sales negotiations. Fortunately for most businesses, asc 606 brings a level of consistency and clarity that did not exist before in saas accounting the wild west is being tamed, and thats a good thing for all of us. Vsoe of the fair value for each element of the deal. For example, under legacy gaap, in an arrangement with a software license. For unprepared companies, vsoe calculation can be nightmare. Separate rules for software sop 972 and vsoe of fair value. It governs how a company that licenses, sells, leases or otherwise markets its products i. In establishing these special rules for software and vsoe, the aicpa has essentially set software uniquely apart from other products, and established a more difficult set of standards for companies to meet in order to put software revenue on their financial statements.
In accounting practices, vendorspecific objective evidence vsoe is a method of revenue recognition allowed by us gaap that enables companies to recognize revenue on specific items on a multiitem sale based on evidence specific to a company that the product has been delivered. Executive summary statement of position sop 972 provides guidance on applying gaap in recognizing revenue from software and softwarerelated transactions. Liability the license usually contains provisions that allocate responsibility and liability between the vendor and the. Structuring software sales transactions for optimal. Predictive maintenance is a similar but distinct category of cmms software wherein meters or sensors predict when a machine may breakdown. The new standard is aimed at reducing or eliminating those inconsistencies, thus improving comparability, and eliminating gaps in guidance. A software license consist of three main parts rights a license grants the customer end user rights to the software. At issue was the companys approach to a onetwo regulatory punch.
Software vendors typically sell their products and services in bundled contracts that cover the software license, installation services, training, and postsale customer support. Contracts that were previously split between two components, usually software license and pcs, may now be split into even more performance obligations. Revenue management and revenue recognition software. More and more companies find themselves dealing with vsoe as embedded software becomes an increasingly essential element in the products of. If vsoe isnt established for one or more contract elements, the residual value typically allocated to the software element must be combined into a. Vsoe unit wishing to supply their own rack must discuss the requirements with viterbi it colocation service before obtaining the rack. Modification requests are logged and tracked, the impact of proposed changes is determined, code and other software artifacts are modified, testing is conducted, and a new version of the software product is released.
Revenue recognition for saas businesses is inherently complex, and depends on your specific revenue model. Why vendors resist negotiating software maintenance fees ive been coming down pretty hard lately on certain software vendors for escalating costs of software maintenance contracts as well as the lack of value and flexibility in maintenance programs. Netsuite was not only impacted by the new revenue recognition rules in its own business, but the software maker has developed a module to help companies implement the new revenue recognition rules. High software maintenance fees and what to do about them. Today, software developers are permitted to use a residual method when there is vsoe of the fair value of undelivered elements such as pcs but no similar evidence of the price at which delivered items are sold on a standalone basis. If these requirements are met, the software is part of a hosting arrangement and will likely be considered distinct. However, one study indicated that over 80% of maintenance effort is used for noncorrective actions. They pay for ongoing product development that provides new product features, regulatory updates, and bug fixes. Accountants and auditors require socalled vendorspecific objective evidence vsoe. Theres an important distinction to be made between preventive maintenance and predictive maintenance.
A software becomes a dime a dozen, many cfos must now confront the. Software maintenance in software engineering is the modification of a software product after delivery to correct faults, to improve performance or other attributes a common perception of maintenance is that it merely involves fixing defects. Therefore, the residual value includes all contract discounts relating to the software component and. Why vendorspecific objective evidence vsoe spells trouble.
Everything you need to know about vsoe but are afraid to ask paul lamparski finance director, global revenues. Vsoe, or vendor specific objective evidence, is fair value for software. This perception is perpetuated by users submitting. Taxware first selected softrax to centralize and manage customer installation data, and to automate maintenance renewals and billings. Since vsoe of fair value for pcs is not assessed on a per customer basis, upon the consummation of such license contracts with discounts or heavily negotiated terms or conditions, for example, maintenance rates outside of our vsoe of fair value for pcs parameters, we reallocate value from license to maintenance over the applicable pcs period. A study in software maintenance june 1993 technical report susan a. Implementing the new revenue guidance in the technology. Years later, taxware turned to softrax to handle all of the companys deferred revenue and vsoe accounting. For example, a software license, installation, and maintenance and support.
Contracts that were previously split between two components, usually software license and pcs, may now be. New revenue recognition standard means big changes for. Regulations new revenue recognition standard means big changes for software companies. Never within the minutiae of the sop does the securities and exchange committee define a single method for establishing vsoe. What are typical maintenance fees as a percentage of up. Software entities may need to change their revenue recognition policies and practices as. Under asc 606, the order of delivery and availability of vsoe for undelivered items does not affect whether promises qualify as separate performance obligations. At softrax, we help you manage complex billing and revenue recognition by providing software solutions designed to fill the functionality gaps that these platforms simply arent equipped to handle. The new revenue recognition standard software and cloud. Vsoe is an acronym for vendorspecific objective evidence. In accounting practices, vendorspecific objective evidence vsoe is a method of revenue. The vsoe unit is responsible for ups backup power, all systems management, monitoring, and hardware and software maintenance of the servers in the viterbi it colocation space.
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