New Accounting Rules for Revenue Recognition

June 15, 2010
By guest blogger - Valery Hill
Accounting Rules for revenue recognition.

The FASB issued two rules (EITF 08-01 and EITF 09-03) that modify revenue recoginition procedures for affected firms which begin their fiscal year after June 30, 2010.

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EITF 08-01, Revenue Arrangements with Multiple Deliverables, allows companies to account for delivered items as separate accounting units if specific conditions are met: (1) The delivered item(s) has value to the customer on a stand-alone basis. (2) If the arrangement includes a general right of return relative to the delivered item(s), delivery, or performance fo the undelivered item(s) is considered probable and substantially in control of the vendor. (Source: Journal of Accountancy)

EITF 09-03, Certain Arrangements That Include Software Elements, allows companies to remove tangible products from the software revenue recoginition guidelines even if both hardware and software function together to deliver a product’s essential functionality.

Practical Examples

1. Software with Maintenance Plan

A company sells a software product bundle which includes software that installs on a personal computer and a 1 year maintenance plan. The revenue for the maintenance plan needs to be deferred over a period of 12 months, while the revenue allocated to the software can be recognized immediately.

2. Appliance, Software, and Warranty

A company sells an appliance, software on the appliance, and a 1 year warranty for $500. The revenue for the appliance and the software can be recognized immediately, but the amount attributed to the warranty must be deferred over 12 months. The amount that is recognized immediately depends on the value assigned to the appliance and software.

Suggested Design for your Accounting Software

Your accounting solution should be able to create deferred revenue schedules for each line item on your customer invoice. This includes the ability to break each line item into an amount that can be immediately recognized as well as an amount which can be deferred according to a revenue recognition schedule.

Your revenue recognition schedule must be flexible enough to begin at the start, end, or middle of a period. In addition if you should have the ability to recognize revenue when payment is received for “uncertain payments” and build custom schedules.

Note about the author: Valery Hill has been implementing ERP software for over 15 years. Her specific areas of expertise include Oracle Financials and Acumatica accounting and ERP software.

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One Response to “ New Accounting Rules for Revenue Recognition ”

  1. Bob Scarborough on February 22, 2012 at 6:52 pm

    This is an important topic for technology companies. To add to the general discussion above – the new EITF compliance rules (as well as the SOP 97.2 rules) require allocation as well as revenue rules application.

    Technology company sales that have multiple related items involved (like software and maintenance – each of which would have less value on its own) are treated as a multi-element arrangement (MEA). The revenue rules (EITF 08-01 and SOP 97.2) outline how the amount of the total sale needs to be apportioned between the different individual elements of the sale. This is to help with consistency (across sales in one company and across companies) as well as to decrease revenue manipulation.

    For example – two sales of the exact same software could look like this:
    Product Sale One Sale Two
    Software 10,000 12,000
    Maintenance 2,000 0

    The total in both of these scenarios is $12,000 for the exact same MEA. However the value on the sales document to the customer is very different. The SOP and EITF standards listed above state that revenue should be allocated between the items on the sale based on the fair value of the items (independently determined) rather than the dollar amounts on the sale itself.

    Once you have allocated the revenue amount to each line you can then apply the appropriate revenue rules to that item.

    Bob Scarborough, Tensoft, Inc.

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