AcSEC Issues Proposal on Software Revenue Recognition

By Anthony J. Mancuso, CPA

The AICPA's Accounting Standards Executive Committee issued Statement of Position No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions, that amends paragraphs 11 and 12 of SOP 97-2 to require recognition of revenue using the residual method when:

* There is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting;

* Vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement; and

* All revenue-recognition criteria in SOP 97-2 other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement are satisfied.

Under the residual method, the arrangement fee is recognized as:

* The total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2; and

* The difference between the total arrangement fee and the amount deferred for the undelivered element, recognized as revenue related to the delivered element.

The SOP also amends SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition, to extend the deferral of the application of passages of SOP 97-2 that is provided by SOP 98-4 through fiscal years beginning on or before March 15, 1999.

The provisions of the SOP that extend the deferral of the application of the passages of SOP 98-4 became effective December 15, 1998. All other provisions of the SOP are effective for transactions entered into in fiscal years beginning after March 15, 1999. Earlier application is permitted as of the beginning of fiscal years or interim periods for which financial statements or information has not been issued. Retroactive application of the provisions of the SOP is prohibited.

For a copy of SOP 98-9, contact the AICPA's Member Satisfaction Team at (888) 777-7077, or visit the AICPA's website at www.aicpa.org. *