Q: How does this apply to Web Based Application Services, if at all?
JW: If the web-based application service includes multiple elements, we would use ESP to allocate revenue to each stand alone element and then generally recognize revenue when that element is delivered. There may be other considerations such as the requirement to recognize set up fees over the longer of the contract period and the expected customer relationship period.
Q: If a company sells software using an on premise subscription model and SAAS-on demand, how can you justify using different revenue recognition models for which is essentially the same business model. The primary difference is on is a time based license that is on premise at the customer's location and the other is time based whereby the customer's software is located at a data center? This is more a request, but it would be helpful to see similar examples where the multiple elements include services, on demand services that include support. Is there anywhere I can obtain this info
JW: If the on-premise subscription model meets the requirements for software revenue (customer has the right and ability to take possession without significant cost) it would be recognized under software revenue recognition (residual method using VSOE).
The SaaS on demand sales would be allocated and recognized under EITF 08-1.
If a transaction had both on premise subscription and SaaS, the allocation would be done using EITF 08-1 and then on premise recognized using residual method and VSOE and the SaaS recognized as a service under 08-1.
Q: is EITF 03-5 no longer relevant?
JW: EITF 03-5 is superseded by EITFs 08-1 and 09-3.
Q: is ASU 2009-14 only used for tangible items w/ software? What is used to determine how to account for a hosting engagement where software is sold?
JW: If the hosting engagement meets the requirements for software revenue recognition because the customer has the right and ability to take possession and self-host without significant cost, then software revenue recognition would continue to be applied. If not, the multiple elements in the arrangement would be allocated revenue according to EITF 08-1.
Q: Would you use residual method for delivered software other than ESP?
JW: The residual method would only be used for the initial revenue allocation for software sales without other non-software elements. Software would use ESP and the relative selling price method for the allocation if the multiple element arrangement included non-software element.
Q: While I understand that contract terms and conditions affect the decision, I am wondering about his opinion on a particular transaction set. If a company responds to an RFP which requires HW, SW & ongoing services (PCS & BPO, for example).
JW: This would appear to be a transaction that requires allocation of revenue to the separate elements using the relative selling price method. If some of the elements are determined to be software elements under the guidance of EITF 09-3, then the residual method would be applied to the allocated amount and VSOE would be required for any undelivered elements.
Q: Assume vendor responds to RFP requiring HW, SW and ongoing services (PCS & Business Process Outsourcing) and also assume that the vendor usually uses contract accounting & guidance of 97-2, an old fashion "Build & Run" scenario. What's your opinion about using ASU 2009-14 to take the transaction outside of 97-2 guidance?
JW: If the hardware and software meet the requirements of EITF 09-3 to determine that the hardware and software work together to provide the functionality of the combined hardware and software product, then the transaction would be accounted for under EITF 08-1 for both the allocation and revenue recognition. If it is determined that there are both software and non-software elements, then revenue would be allocated using ESP and the relative selling price method and the software recognized under software revenue recognition and the non-software elements recognized under EITF 08-1.
Q: Does this mean that the software & PCS are taken outside of 97-2 with the hardware?
JW: It depends on whether the hardware and software meet the requirements of EITF 09-3 for treatment as non-software. If the hardware and software are always sold together and work together to provide the functionality, then the entire transaction would appear to be outside of software accounting. See Case A.
If the hardware is not always sold with the software, the determination might be that the hardware is a non-software element and the software is a software element. See Case B.
It would depend on the facts and circumstances.
Q: If your company has VSOE established for your product, can you choose to use BESP instead to avoid having to keep VSOE data and analysis?
JW: If a product currently has VSOE, the expectation is that the company would continue to use VSOE. The company would continue to use VSOE unless the situation changed and the company was no longer able to establish VSOE because the pattern of stand-alone sales no longer met the requirements of VSOE.
Q: If we have 2 different ways to sell our product - premise (where the customer buys a perpetual license and has it on site) and SaaS, the premise deals would be under SOP 97-2 and the SaaS deals would be under EITF 08-1, correct?
JW: For software only sales, the company would continue to use SOP 97-2 for allocation and revenue recognition.
For SaaS arrangements, the company would use ETIF 08-1 for allocation and revenue recognition.
If a transaction has both software and SaaS included in one sale, the revenue would be allocated to the separate elements using the relative selling price method of EITF 08-1 and ESP.
Then the software would be recognized using the residual method and VSOE and the SaaS would be recognized using EITF 08-1.
Q: In example 1, how is the ratable revenue split up between hardware, software, and support?
JW: Allocation of the ratable revenue should be on a reasonable and consistent manner to the different classes in the statement of operations/income statement. Pro rata allocation to each element based on contractual amount might be one method. The total revenue would be equal to the total ratable revenue for that period. Consideration would be given to each element. For example, the amount of revenue for support would probably be limited to 1/12th for each month in the recognition period.
