On May 25th, Tensoft hosted a webcast* with Silicon Valley software revenue recognition expert Jeffrey Werner entitled: Revenue Recognition Accounting for Software as a Service (SaaS). This is the fourth of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.
Question - Stand-Alone Value - Delivered and Undelivered Items
I attended the webcast yesterday on revenue recognition for SaaS. The presentation helped my understanding of the new guidelines for multiple-element arrangements. I do have a question I’m hoping you can clarify for me regarding the stand-alone value criteria. Only the “delivered item” needs to have stand-alone value; the “undelivered item” does not need to have stand-alone value. Is this correct? So as illustrated in example 3, training courses and consulting packages sold with a hosted services contract are still considered to be the delivered items even if they are not actually delivered up-front but rather at some point later in the hosted services term.
A simplified common multiple-element arrangement at my company is: 12 months of hosted services, training course, non-implementation hourly consulting.
Since we frequently sell both training and consulting services separately, we have met the stand-alone value criteria. We also do not have a general right of return. Therefore, in the above scenario, once we have allocated based on their relative selling price, we can appropriately recognize the hosted services ratably over 12 months and recognize the training when complete (i.e., month 2) and recognize the consulting as performed (i.e., 50% delivered in month 3, 25% in month 4 and 25% in month 6). Am I interpreting and applying the guidance correctly?
There are two issues with "stand alone value" – determining whether elements can be separated and determining the value of each separate element.
First Separation - in order to separate elements of an arrangement, each element must have stand-alone value. That means each element must provide value that is independent of the other elements. An example of an element that does not have stand-alone value is set up fees. The customer only receives value from them in conjunction with the monthly use of the service. If the elements of an arrangement have stand-alone value, then we can proceed to the next step and allocate value to each element.
Second Allocation - we can allocate the value to each element in several ways.
For software companies and companies that have not adopted EITF 08-1, the value is determined by allocating the VSOE (Vendor-Specific Objective Evidence) to the undelivered elements and allocating the residual value to the delivered elements.
If a company has adopted EITF 08-1 or for all calendar year-end companies after January 1, 2011, we allocate using either VSOE, TPE (Third Party Evidence) or BESP (Best Estimated Selling Price).
Regarding your specific question, it is hard for me to understand how a multiple element arrangement would have a delivered item with stand-alone value and an undelivered element without stand-alone value. If that were the case, it would seem we would only have one element to account for: the bundle.
In a transaction with monthly hosted services, training and non-implementation consulting, it would seem that there are three elements with stand-alone value. Each element would need to be allocated a portion of the total fee which may or may not be the invoice amount depending on the facts and the revenue recognition method (Residual or Relative Selling Price). If the training and consulting are frequently sold separately, those separate sales could be used to establish their value. Since the monthly services are undelivered, under the residual method we would need VSOE for these. This could be established with a renewal rate. Under the Relative Selling Price method, we would need to estimate the value of the monthly services and then allocate the total fee to each element using the relative percentage of the total fee.
* Click here to view this on-demand webcast in its entirety.