- The price charged when the same element is sold seperately.
- For an element not yet being sold separately, the price established by management having the relevant authority; it must be probably that the price, once established, will not change before the iintroduction of the element into the marketplace.
SOP 97-2 specifies that the fee from a multiple-element arrangement should be allocated to the elements based on VSOE of fair value of the elements.
Upgrade Rights - Allocation of Revenue
AcSEC concluded that, in allocating revenue to an ugrade right, the upgrade price should be used to determine the amount of the license fee to be deferred due to the difficulty in determining which version of the software induced the customer to enter into the arrangement. If sufficient vendor-specific objective evidence does not exist for the allocation of the fee to the upgrade right, revenue from the arrangement should be deferred until the earlier of the point at which (a) such sufficient vendor-specific objective evidence does exist, or (b) all elements of the arrangement have been delivered.
Example: ABC Corp enters into a perpetual licensing arrangement with Customer to delivery Software, version 2.0 of Product A, and to provide PCS for a one-year period for a nonrefundable fee of $100,000. Because Customer is aware that ABC has plans to release Version 2.1 of Product A, ABC has promised that Customer will receive Version 2.1 when it is released at no additional charge.
VSOE of fair values for the elements of the arrangement are as follows: Product A, Version 2.0 - $80,000, upgrade to Version 2.1 (for existing users of 2.0) - $30,000; and one year of PCS - $12,000. ABC is unable to estimate the percentage of customers that are expected to exercise the upgrade right, so ABC would assume that 100% of customers will exercise the right.
| Total arrangement fee | $ 100,000 | ||
| Specific upgrade right | $ (30,000) | ||
| Remaining fee to allocate | $ 70,000 | ||
| Fair Value | Pct | Revenue | |
| Version 2.0 | $ 80,000 | 87% | $ 60,900 |
| PCS | $ 12,000 | 13% | $ 9,100 |
| Total | $ 92,000 | 100% | $70,000 |
| Version 2.1 upgrade right | $30,000 | ||
| Total Revenue | $100,000 |
