The amendments in this Update require that hardware components of a tangible product containing software components always be excluded from the software revenue guidance.
If the software contained on the tangible product is essential to the tangible product's functionality, the software is excluded from the scope of the software revenue guidance.
The Task Force identified the following factors to consider in determining whether the tangible product contains software that works together with the nonsoftware components of the tangible product to deliver the tangible product's essential functionality:
- If sales of the tangible product without the software elements are infrequent, a rebuttable presumption exists that software elements are essential to the functionality of the tangible product.
- A vendor may sell products that provide similar functionality, such as different models of similar products. If the only significant difference between similar products is that one product includes software that the other product does not, they will be considered the same product for the purpose of evaluating factor (1).
- A vendor may sell software on a standalone basis. The vendor also may sell a tangible product containing that same software. The separate sale of the software does not lead to a presumption that the software is not essential to the functionality of the tangible product.
- Software elements do not need to be embedded within the tangible product to be considered essential to the tangible product's functionality.
- The nonsoftware elements of the tangible product must substantively contribute to the tangible product's essential functionality. For example, the tangible product should not simply provide a mechanism to delivers the software to the customer.
