PCS - A Seperate Element

If a multiple-element software arrangement includes explicit or implicit rights to PCS, PCS is a separate element of the arrangement. (97-2 Paragraph 57) If a multiple-element software arrangement includes explicit or implicit rights to PCS, the total fees from the arrangement should be allocated amount the elements based on vendor-specific objective evidence of fair value. The fair value of the PCS should be determined by reference to the price the customer will be required to pay when it is sold separately (that is, the renewal rate). The portion of the fee allocated to PCS should be recognized as revenue ratably over the term of the PCS arrangement, because the CPS services are assumed to be provided ratably. However, revenue should be recognized over the period of the PCS arrangement in proportion to the amounts expected to be charged to expense for the PCS services rendered during the period if -

• Sufficient vendor-specific historical evidence exists demonstrating that costs to provide PCS, are incurred on other than a straight -line basis. In making this determination, the vendor should take into consideration allocated portions of cost accounted for as research and development (R&D) costs and the amortization of costs related to the upgrade/enhancement capitalized in conformity with FASB Statement No. 86, Accounting for Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Such costs should be considered as part of the costs to provide PCS.
• The vendor believes that it is probable that the costs incurred in performing under the current arrangement will follow a similar pattern.

(SOP 97-2, Paragraph 58) If sufficient vendor specific objective evidence does not exist to allocate the fee to the separate elements and the only undelivered element is PCS, the entire arrangement fee should be recognized ratably over (a) the contractual PCS period (for those arrangements with explicit rights to PCS) or (b) the period during which PCS is expected to be provided (for those arrangements with implicit rights to PCS). Allocation of Revenue-to and Recognition-of Revenue for PCS Example - ABC Corp. enters into an arrangement with Customer to deliver Product A, which is currently available, and Product B, when available, and to provide PCS for a one-year period. ABC does not separately sell PCS and, thus, does not have sufficient VSOE of fair value to allocate revenue to the elements. Product A is delivered upon consummation of the arrangement and Product B is delivered three months later. ABC would defer the arrangement fee until Product B is delivered. Assuming all other revenue recognition criteria in 97-2 are met, upon delivery of Product B the PCS would be the only undelivered element and the entire fee would be recognized ratably over the remaining term of the PCS agreement.