The rules for revenue recognition for computer software contracts contained in SOP 97-2 are the most convoluted set of rules the accounting profession has ever devised, at least in my experience. For continuing developments in this area, refer to the AICPAís site, http://www.aicpa.org/members/div/acctstd/general/tpa4.htm. They are designed to delay revenue recognition until it is clear that all the work has been completed and there are no obligations of any kind floating around. And, given the genesis of SOP 97-2, thatís not surprising. In fact, the interpretation of SOP 97-2 has become more restrictive since its inception.
I am told that the large accounting firms felt they were burned by computer equipment manufacturers which sold equipment on operating leases to leasing companies under arrangements that obligated the seller to remarket the equipment for the leasing company or had provisions that appeared to favor the remarketing of the lessorís equipment. As years went by, many accountants came to believe that these transactions were more like loans secured by equipment and not true sales of the equipment. So accountants began to take a more expanded view of what an obligation was which would delay revenue recognition.
In addition, accountants also felt that they were being burned by software companies which took aggressive views as to when software revenues could be recognized, including situations where the retail channel was stuffed with software which could be returned if not sold. Or underestimating costs to complete. Or booking sales where it was very questionable as to the customers ability to pay for the software over an extended payment period.
The result was that the accountants decided that the time had come to limit their liability for overly aggressive concepts of revenue recognition and to install very strict accounting rules. The pendulum has clearly swung to its restrictive phase. The software industry is now governed by a set of rules that requires extensive amounts of accounting, sales and management time to make sure that the rules are complied with. Negotiations with customers have become more complex since not only do licensors have to draft contracts to comply with SOP 97-2, but licensees are aware of the accounting concerns and use the leverage to better their position. The SEC also weighed in on the issue with Staff Accounting Bulletin 101 relating to revenue recognition issues in general and clearly supporting the restrictions of SOP 97-2.
Detailed aspects of SOP 97-2 will be added to this section. The first on the meaning and effect of extended payment terms has been added on April 19, 2002.
Some sources of information on the Web
DiCarta - SAB 101 Resource Center
Ernst & Young - Software Revenue Recognition, As Affected by SOP 98-4
PriceWaterhouse Coopers - User-Friendly Guide to Understanding Software Revenue Recognition
Softrax - Avoiding Revenue Management Surprises
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February 27, 2006