Software Revenue Recognition Resource Center

For many software companies, revenue growth is the single most important financial metric analyzed by financial statement users in assessing a company's performance. From emerging venture-backed companies entering into their first customer arrangements to mature public companies publishing financial statements every three months, revenue continues to be an area of intense focus. However, software revenue recognition is unquestionably an evolving and complex area.

Whether you are a traditional enterprise software or software-as-a-service (SaaS) company, the ways in which software and services are bundled and delivered continues to make revenue recognition decisions difficult. Among the many issues faced by software companies are the following:

• Determining the correct accounting model (e.g., enterprise software versus SaaS model)
• Assessing the significance of bundled services
• Evaluating the revenue implications of nontraditional licensing transactions
• Allocating revenue with and without vendor specific objective evidence of fair value (VSOE)
• Planning for and applying new revenue recognition guidance

The large volume of existing revenue recognition resources available and the significant changes on the horizon can be overwhelming.

FASB/IASB joint project: Revenue recognition
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (the Boards) are jointly working on a project to develop a revenue recognition standard with the goals of clarifying the principles for recognizing revenue and developing a common revenue standard. In June 2010, the Boards issued an initial Exposure Draft (ED) on this project, which was issued by the FASB as a proposed Accounting Standards Update (ASU), Revenue Recognition (Topic 605): Revenue from Contracts with Customers. The comment letter period closed in October 2010 and during most of 2011 the Boards evaluated the feedback received as a result of the comment letter process (nearly 1,000 comment letters were received) and redeliberated the conclusions they had reached in the project based on this feedback. Given the extent of the feedback, the Boards issued a revised ED on November 14, 2011, which was issued by the FASB as a proposed ASU, Revenue Recognition (Topic 605): Revenue from Contracts with Customers, Revision of Exposure Draft Issued June 24, 2010 (the revised ED). In connection with this revised ED, McGladrey has:

• Issued a whitepaper, FASB and IASB issue revised exposure draft on revenue recognition, which discusses the major provisions included in the revised ED
• Held a webcast, Revised revenue recognition exposure draft – What does it mean for you?, which covers the revised ED’s major provisions and addresses the approach required to comply with the core principle included in the revised ED
• Prepared a two-page handout, Revised revenue recognition exposure draft – What does it mean for you?, which highlights some of the key changes that would result from the guidance in the revised ED
• Submitted a comment letter to the FASB with recommended changes and improvements to the revised ED.

Multiple-deliverable revenue arrangements
In 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force) and ASU 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force). These ASUs generally result in the acceleration of revenue recognition for financial reporting purposes, which necessitates that companies determine whether any change in book practices will result in a change in method of accounting for tax purposes requiring the consent of the IRS National Office

For more information about ASU 2009-13 and ASU 2009-14, refer to the following McGladrey whitepapers:

• Revised model for multiple-deliverable revenue arrangements better reflects economics
• Revised software revenue recognition guidance to scope in fewer arrangements

In addition, a recording of a McGladrey webcast on ASU 2009-13 and ASU 2009-14, Revenue Recognition Lessons Learned: A Deeper Look at EITF 08-1 and 09-3 (ASU 2009 13/14), is also available.