Multi-element arrangements are created when multiple inter-dependent items are sold to customers.  For SaaS companies, some examples of this include: setup fees, subscriptions, training, and professional services.  When multi-element arrangements occur, they’re subject to EITF 08-01.

Consumer businesses may try to eliminate the multi-element arrangements requirements of EITF 08-01 by offering only subscription licensing.   However, companies who are in the business-to-business space often don’t have that option.  Your market will dictate what mix of products and services that you need to offer your customers, not the hope to streamline the revenue recognition process.

A special scenario occurs when you offer product modifications – where there is a required delivery component tied to the subscription sale.  This scenario can require the use of SOP 81-1, along with EITF 08-01.  SOP 81-1 requires recognition of software revenue based on the delivery of the required modifications, often by percent complete methodology.

Often these product modification scenarios are something that happens early in a company’s history, when your product is still maturing.  If this is the case, the need to offer product modifications should disappear as your product matures and your installed base and reputation grow.  However, if offering product modifications is part of your long-term go-to-market strategy, then you may want to look at options such as isolating the customization layer in your product so that it becomes an implementation challenge rather than a product extension requirement.

Whenever possible, it’s reasonable and smart to try to simplify revenue recognition requirements.  A revenue recognition expert can help with planning for this, as well as providing tactical assistance with agreement negotiations, to make sure the agreement optimizes your revenue opportunities. 

 Re-posted from ERP SoftwareBlog:

Think for a minute about how ubiquitous software has become.  How many everyday consumer products, such as mobile devices, have embedded software today?  How would businesses function without software?  How many online services depend on software to take care of their customers?  Every day new smart products or helpful services are created – software is pervasive.

When software (or software based) products are sold the sale is often a combination of related items.  One example of this is the sale of software plus maintenance.   These are normally sold as two separate line items but are inextricably related to each other; so they constitute a multi-element sale.   Another example is an online subscription that includes setup as well as ongoing service.  A multi-element sale is, simply, the sale of multiple related items to a customer.

Okay, so lots of companies are affected – what’s the big deal?  The issue is that the EITF and the FASB have recently issued guidance that many companies have not yet adopted, and their auditors are starting to call that to their attention.   We’re seeing – and hearing about – significant amounts of pain at companies who have not yet analyzed their various sales arrangements and taken steps to ensure correct revenue recognition for such multiple-deliverable arrangements. 

Tensoft can help.   In addition to Tensoft Revenue Cycle Management (RCM), a suite of products that brings together the specific revenue recognition, recurring billing, and contract management functionality that today’s technology companies need, we offer an optional Compliance Module.  Integrated with Microsoft Dynamics, the determined rules are applied based on sales transactions, the appropriate method, and the independent revenue valuation for each item.   With fully auditable processes and reports,   Tensoft RCM is the only solution of its kind that has passed the rigorous Certified for Microsoft Dynamics (CfMD) testing process. 

For additional information about this topic, you may want to review the recorded webcasts in Tensoft’s Resource Center (www.tensoft.com/resources), including “EITF 08-1 and the Relative Selling Price Method for Multiple Element Arrangements.”  This webcast was presented live on 9/20/11.  Tensoft regularly hosts webcasts that are eligible for CPE credit, and is an accredited member of the National Registry of CPE Sponsors.