Revenue Recognition Checklist - Fixed Fee or Determinable

Are fees based on fixed clear deliverables or are there variable terms? Variable terms will stop recognition. Are there any cancellation or refund previleges? If so, then recognition may be deferred. Have we offered the customer extended payment terms or are fees due beyond normal business practice? If so, then recognition will be deferred until the due date(s)? Are there acceptance clauses associated with delivery? If so, then recognititon will be deferred until the product is tested and accepted. Are the fees related to maintenance? If so, then revenue will be recognized over the period covered.

Revenue Recognition - Basics

Revenue recognition is realized or realizable and earned when all of the following criteria are met:

• Persuasive evidence of an arrangement exists.
• Delivery has occurred or services have been rendered.
• The seller's price to the buyer is fixed or determinable.
• Collectibility is reasonably assured.

Evaluation of Whether a Fee is Fixed or Determinable

If a software vendor's participation in an end user customer's financing results in incremental risk that the software vendor will provide a refund or concession to either the end user customer or the financing party, there is presumption that the arrangement fee is not fixed or determinable. Any one of the following conditions or software vendor actions results in incremental risk and a presumption that the fee is not fixed or determinable:

1. Provisions that require the software vendor to indemnify the financing party above and beyond the standard indemnification provisions that are explicitly included in the software arrangement between the software vendor and the end user customer.
2. Provisions that require the software vendor to make representations to the financing party related to customer acceptance of the software that are above and beyond the written acceptance documentation, if any, that the software vendor has already received from the end user customer.
3. Provisions that obligate the software vendor to take action (such as to terminate the license agreement and/or any related services), on behalf of the financing party in the eveent that the end user customer defaults under the financing.
4. Provisions that prohibit or limit the ability of the software vendor to enter into another software arrangement with the customer for the same or similar product if the end user customer defaults under the financing.
5. Provisions that require the software vendor to guarantee, certify, or otherwise attest in any manner to the financing party that the customer meets the financing party's qualification criteria.
6. Software vendor has previously provided concessions to financing parties or to customers to facilitate or induce payment to financing parties.
7. Provisions that lead to the software vendor's guarantee of the customer's indebtedness to the financing party.

Evaluate fixed or determinable fees for resellers - because a reseller is not the ultimate user of software products, the following factors should be considered when evaluating whether the fee is fixed or determinable in arrangements with resellers:

1. Business practices, the resller's operating history, competitive pressurs, informal communications, or other factors indicate that payment is substantially contingent on the reseller's success in distributing individual units of the product.
2. Resellers are new, undercapitalized, or in financial difficulty and m ay not demonstrate an ability to honor a commitment to make fixed or determinable payments until they collect cash from their customers.
3. Uncertainties about the potential number of copies to be sold by the reseller may indicate that the amount of future returns cannot be reasonably estimated on delivery; examples of such factors include the newness of the product or marketing channel, competitive products, or dependence on the market potential of another product offered (or anticipated to be offered) by the reseller.
4. Distribution arrangements with resellers require the vendor to rebate or credit portion of the original fee if the vendor subsequently reduces its price for a product and the reseller still has rights with respect to the product (sometimes referred to as price protection).

Fixed or Determinable Fees and Collectibility

SOP 97-2 specifies that in order to recognize revenue for a software arrangement, a vendor's fee must be fixed or determinable, and collectible. A software licensing fee is not fixed or determinable if the amount is based on the number of units distributed or copied, or the expected number of users of the product. Factors that Affect the Determination of Whether a Fee is Fixed or Determinable and Collectible:

1. A number of arrangements that call for fixed or determinable payments, including minimum royalties or license fees from resellers, specify a payment period that is short in relation to the period during which the customer is expected to use or market the related products. Because a product's continuing value may be reduced to the subsequent introduction of enhanced products by the vendor or competitors, the possibility that the vendor still may provide a refund or concession to a creditworthy customer to liquidate outstanding amounts due under the terms of the initial transaction increases as payment terms become longer.
2. For the reason cited in #1, any extended payment terms in a software licensing arrangement may indicate that the fee is not fixed or determinable. Further, if payment of a significant portion of the software licensing fee is not due until after expiration of the license or more than 12 months after delivery, the licensing fee should be presumed not to be fixed or determinable. However, this presumption may be overcome by evidence that the vendor has a standard business practice of using long-term or installment contracts and a history of successfully collecting under the original payment terms without making concessions.
3. If it cannot be concluded that a fee is fixed or determinable at the outset of an arrangement, revenue should be recognized as payments from customers become due (assuming all other conditions for revenue recognition in this SOP have been satisfied).

If collectibility is considered reasonably assured at the outset of an arrangement and revenue is recognized, but events arise in subsequent periods such that the related account receivable is no longer deemed collectible due to the subsequent deterioration of the customer's credit worthiness, bad debt expense should be recorded rather than reversing the previously-recorded revenue. Extended Payment Terms (Pyment Due In One Year or Less) - The following factors should be considered in evaluating whether extended payment terms are fixed or determinable:

1. Susceptibility of software to technological obsolescense - If the software is susceptible to rapid technological obsolescence, it is more likely that a fee inolving extended payment terms is not fixed or determinable.
2. Costs to implement the software - If the customer will incur significant costs to implement the software or the software will be integrated into a large complex system with pervasive use of the software throughout the organization, it is more likely that a fee involving extended payment terms is fixed or determinable.

Overcoming the presumption of concessions in extended payment term arrangements - To have a "history of successfully collecting under the original payment terms without making concessions," a vendor woul dhave to have collected all payments as due under comparable arrangements without providing concessions. Examples of factors that should be assessed in evaluating a vendor's history include, but are not limited to, the following:

• Similarity of customers
• Similarity of products - types of products; stages of product life cycle; elements included in the arrangement
• Similarity of license economics - Length of payment terms; economics of li cense arrangement (the overall economics of the license arrangement should be reviewed to ensure that the vendor can conclude that the history developed under a previous arrangement is relevent, particularly if the primary products licensed are near the end of their lives and the customer would not be entitled to the updated version under a PCS arrangement).

Customer Financing with No Software Vendor Participation and Software Revenue Recognition:

How should a software vendor recognize revenue if it inters into an arrangement with an end user customer that contains customary (that is, non-extended) payment terms and the end user customer obtains, without the software vendor's participation, financing from a party unrelated to the software vendor?

Because the software arrangement's payment terms are not extended, and the software vendor does not participate in the end user cusotmer's financing, the software vendor should recognize revenue upon delivery of the software product, provided all other requirements or revenue recognition are met.

Effects of Prepayment on Software Revenue Recognition When Vendor Participates in Customer Financing?

If the the software vendor's participation in the customer's financing results in incremental risk that the software vendor will provide a refund or concession to either the end user customer or the financing party, the presumption is that the fee is not fixed or determinable.

Basic Revenue Recognition Pricipals

Software arrangements range from those that provide a license for a single software product to those that, in addition to the delivery of software or a software system, require significant production, modification or customization of software. If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the entire arrangement should be accounted for in conformity with Accounting Research Bulletin (ARB) No. 45, Long-Term Construction-Type Contracts, using the relevant guidance herein, and in SOP 81-1, Accounting for performance of Construction-Type and Certain Production-Type Contracts. Shorter version - Software arrangements may include:

• Just software
• Software, services & support
• lots of different combinations

If contact accounting does not apply, SOP 97-2 specifies four criteria that must be met prior to recognizing revenue for a single-element arrangement or for the individual elements within the scope of SOP 97-2 in a multiple-element arrangement.

1. Persuasive evidence of an arrangement exists.
2. Delivery has occurred.
3. Vendor's fee is fixed or determinable.
4. Collection is probably.