Fixed or Determinable Fees and Collectibility

SOP 97-2 specifies that in order to recognize revenue for a software arrangement, a vendor's fee must be fixed or determinable, and collectible. A software licensing fee is not fixed or determinable if the amount is based on the number of units distributed or copied, or the expected number of users of the product. Factors that Affect the Determination of Whether a Fee is Fixed or Determinable and Collectible:

1. A number of arrangements that call for fixed or determinable payments, including minimum royalties or license fees from resellers, specify a payment period that is short in relation to the period during which the customer is expected to use or market the related products. Because a product's continuing value may be reduced to the subsequent introduction of enhanced products by the vendor or competitors, the possibility that the vendor still may provide a refund or concession to a creditworthy customer to liquidate outstanding amounts due under the terms of the initial transaction increases as payment terms become longer.
2. For the reason cited in #1, any extended payment terms in a software licensing arrangement may indicate that the fee is not fixed or determinable. Further, if payment of a significant portion of the software licensing fee is not due until after expiration of the license or more than 12 months after delivery, the licensing fee should be presumed not to be fixed or determinable. However, this presumption may be overcome by evidence that the vendor has a standard business practice of using long-term or installment contracts and a history of successfully collecting under the original payment terms without making concessions.
3. If it cannot be concluded that a fee is fixed or determinable at the outset of an arrangement, revenue should be recognized as payments from customers become due (assuming all other conditions for revenue recognition in this SOP have been satisfied).

If collectibility is considered reasonably assured at the outset of an arrangement and revenue is recognized, but events arise in subsequent periods such that the related account receivable is no longer deemed collectible due to the subsequent deterioration of the customer's credit worthiness, bad debt expense should be recorded rather than reversing the previously-recorded revenue. Extended Payment Terms (Pyment Due In One Year or Less) - The following factors should be considered in evaluating whether extended payment terms are fixed or determinable:

1. Susceptibility of software to technological obsolescense - If the software is susceptible to rapid technological obsolescence, it is more likely that a fee inolving extended payment terms is not fixed or determinable.
2. Costs to implement the software - If the customer will incur significant costs to implement the software or the software will be integrated into a large complex system with pervasive use of the software throughout the organization, it is more likely that a fee involving extended payment terms is fixed or determinable.

Overcoming the presumption of concessions in extended payment term arrangements - To have a "history of successfully collecting under the original payment terms without making concessions," a vendor woul dhave to have collected all payments as due under comparable arrangements without providing concessions. Examples of factors that should be assessed in evaluating a vendor's history include, but are not limited to, the following:

• Similarity of customers
• Similarity of products - types of products; stages of product life cycle; elements included in the arrangement
• Similarity of license economics - Length of payment terms; economics of li cense arrangement (the overall economics of the license arrangement should be reviewed to ensure that the vendor can conclude that the history developed under a previous arrangement is relevent, particularly if the primary products licensed are near the end of their lives and the customer would not be entitled to the updated version under a PCS arrangement).

Customer Financing with No Software Vendor Participation and Software Revenue Recognition:

How should a software vendor recognize revenue if it inters into an arrangement with an end user customer that contains customary (that is, non-extended) payment terms and the end user customer obtains, without the software vendor's participation, financing from a party unrelated to the software vendor?

Because the software arrangement's payment terms are not extended, and the software vendor does not participate in the end user cusotmer's financing, the software vendor should recognize revenue upon delivery of the software product, provided all other requirements or revenue recognition are met.

Effects of Prepayment on Software Revenue Recognition When Vendor Participates in Customer Financing?

If the the software vendor's participation in the customer's financing results in incremental risk that the software vendor will provide a refund or concession to either the end user customer or the financing party, the presumption is that the fee is not fixed or determinable.