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 fifth of five blog entries detailing Werner’s responses to audience questions posed after the live webcast.
Question - Stand-Alone Value - Delivered and Undelivered Items (Part 2)
To elaborate on whether we have stand-alone value on the undelivered element, we generally sell our hosted services on a stand-alone basis. There is no requirement for the customer to purchase professional services. However, we do have one service offering in which consulting is always sold along with the hosted services as a bundled package. Each element (hosted and consulting) is itemized and assigned a value in the contract. Similar to example 4 in the webcast, my conclusion would be that we do not have stand-alone value for these specific service contracts and therefore must account for the entire arrangement as a single unit of accounting and recognize the revenue ratably over the hosted service term.
Where the guidance gets a little fuzzy for me is with respect to the revenue allocation when there is no stand-alone value for any of the elements in an arrangement. For these scenarios, is it still appropriate to allocate revenue between hosted revenue and consulting revenue on the basis of their relative selling price versus prices stated in the contract? Revenue recognition in total is the same but the classification would be different.
Response
1) If the consulting services are sold separately on a standard hourly or daily basis, then you may be able to establish stand-alone value. If you have adopted EITF 08-1, you would estimate the selling price, assuming that the consulting had a separate value to the customer, independent of the hosted services.
2) If there is separate value to the customer independent of the other elements, the accounting depends on your method.
If you are under the current accounting of EITF 00-21, without VSOE you would take all the revenue ratably.
If you have adopted EITF 08-1, you would estimate the value of each separate element and use the relative selling price method.
* Click here to view this on-demand webcast in its entirety.
