Arrangements that include tangible products and software elements

The following cases illustrate the guidance in paragraphs 985-605-15-3 through 15-4 and paragraph 985-605-25-10.  The cases provide guidance for purposes of allocating arrangement consideration in a multiple-element revenue arrangement that includes a tangible product and software.  The case illustrate whether a product contains software elements and nonsoftware elements that function together to deliver the tangible product's essential functionality as discussed in paragraph 985-605-15-4.  The cases are:

a.  Computer with operating system included
b.  Computer with operating system excluded more than infrequently
c.  Computer and multiple operating systems
d.  Computer with additional software products included
e.  Personal digital assistant
f.  Computer with operating system sold separately
g.  Computer and undelivered software elements
h.  Standalone sale of an operating system
i.  Computer with nonessential software and postcontract customer support included
j.  Networking equipment
k.  Similar products
l.  Change in business practice

Software that is more-than-incidental to the product or service

The Software and software-related elements of arrangements that include software that is more-than-incidental to the products or services in the arrangement as a whole.  Indicators that software is more-than-incidental to the product or service in an arrangement as a whole include (but are not limited to):

1. The software is significant focus of the marketing effort or is sold separately.
2. The vendor is providing postcontract customer support.
3. The vendor incurs significant costs that are within the scope of Subtopic 985-20.

ASU 2009-14, Subtopic 985-605 - How Do the Main Provisions Differ from Current U.S. GAAP?

The amendments in this Update revise the scope of the software revenue guidance such that software-enabled tangible would not be within its scope.  The most significant effect of this would be that a vendor will no longer need to have VSOE of selling price of the undelivered elements sold with a software-enabled tangible product; this is expected to increase a vendor's ability to separately account for the sale of those products from any undelivered elements in an arrangement including those products.

ASU 2009-14, Subtopic 985-605 - Main Provisions

Update does not affect software revenue arrangements that do not include tangible products.  They also do not affect software revenue arrangements that include services if the software is essential to the functionality of those services.

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:

1. 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.
2. 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).
3. 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.
4. Software elements do not need to be embedded within the tangible product to be considered essential to the tangible product's functionality.
5. 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.

If a tangible product contains software that is not essential to the product's functionality, that nonessential software and any other deliverables within the arrangement (other than the nonsoftware components of the tangible product) that relate to the nonessential software are within the scope of the software revenue guidance in Subtopic 985-605 and a deliverable excluded from the scope of Subtopic 985-605, the undelivered elemtnt shall be bifurcated into a software deliverable and a nonsoftware deliverable.

VSOE - Definition from ASU 2009-14, Topic 985-605

A vendor must sell or intend to sell a particular element separately to assert vendor-specific objective evidence for that element.  If a vendor does not have VSOE for the undelivered elements in an arrangement, the revenue associated with both the delivered and undelivered elements is combined into one unit of accounting.  Any revenue attributable to the delivered products is then deferred and recognized at a later date, which in many cases is as the undelivered elements are delivered by the vendor.

ASU 2009-14, Subtopic 985-605 - PDF from FASB

From FASB.org, click here for pdf.

EITF Issue 09-3

The Task Force recommended to the FASB chairman that a separate Issue be added to the EITF agenda to consider changes to the accounting for multiple element arrangements under SOP 97-2. The Issues are:

Issue 1 - Whether this Issue should modify the measurement criteria or the scope of SOP 97-2. The Task force decided that the issue should focuso n amending the scope of 97-2. Other task force members thought this should be discussed in context of FASB/IASB's review of revenue recognition.

 Issue 2 - If the Task Force decides to change the scope of SOP 97-2, how the scope of SOP 97-2 should be modified. Task Force decided 97-2 should be modified such that the following products would be considered non-software deliverables and therefore be excluded from 97-2: Tangible products containing software components that function together to deliver the product's essential functionality.

Issue 3 - If the Task Force chooses to address measurement in Issue 1, how the measurement criteria within SOP 97-2 should be modified.

Issue 4 - If the Task Force chooses in Issue 3 to align the measurement criteria in SOP 97-2 with Issue 08-1, whether the resideual allocation method should be retained within SOP 97-2 if the Task Force decides to eliminate the residual allocation method for arrangements subject to Issue 08-1.

 Issue 5 - If the Task Force chooses in Issue 3 to align the measurement criteria in SOP 97-2 with Issue 08-1, whether the subscription accounting guidance in paragraphs 48 and 49 of SOP 97-2 should be retained.

Issue 6 - Paragraph 37 of SOP 97-2 requires that the amount allocated to a specified upgrade right be reduced based on an estimate of customers not expected to exercise the right ("breakage"). If the Task Force chooses in Issue 3 to align the measurement criteria in SOP 97-2 with Issue 08-1, whether the guidance in paragraph 37 of SOP 97-2 relating to breakage should be retained.

Issue 7 - Paragraphs 43-47 of SOP 97-2 provide guidance on accounting for fixed fee license or reseller arrangements that provide customers with the right to reproduce or obtain copies at a specified price per copy for two or more software products. If the Task Force chooses in Issue 3 to align the measurement criteria in SOP 97-2 with Issue 08-1, whether this guidance should be retained or revised.