Example - ABC Corp. enters into an arrangement with Customer to deliver Product A. ABC does not have a contractual obligation to provide PCS to Customer. However, ABC maintains an Internet site onto which it periodically places upgrades and enhancements for Product A. An implied PCS arrangement exists. Therefore, if ABC does not have VSOE of fair value of the PCS arrangement, PCS is the only undelivered element, and all other revenue recognition criteria of 97-2 are met, the entire fee would be recognized ratably over the period during which the PCS is expected to be provided.
Example - ABC Corp. enters into an arrangement with Customer to deliver payroll processing software (Product A). ABC does not have a contractual obligation to provide PCS to Customer (i.e., Customer is not contractually entitled to receive any software updates, including updates for changes in tax laws). However, ABC has a history of developing updates whenever there is a change in laws and making those updates available free of charge on its web site for customers that have previously purchased Product A.
The updates to Product A for changes in tax laws meet the definition of an upgrade/enhancement under 97-2. The updates extend the life of the software and significantly increase its marketability. Without updating the payroll processing software for changes in tax laws, the software would become obsolete whenever there is a significant change in the tax laws. Therefore update to Product A for changes in tax laws extend the life of the original product. Also, a customer would not license payroll software that is unable to accurately calculate an employee's tax withholdings, so the updates significantly improve the marketability of the original product. Although ABC is not contractually obligated to provide updates to Customer, the updates can be accessed through ABC's web site and, thus, an implied PCS arrangement exists. If ABC does not have VSOE of fair value for the PCS arrangement, PCS is the only undelivered element, and all other revenue recognition criteria in 97-2 are met, the entire fee would be recognized ratably over the period during which the PCS is expected to be provided.
