New 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.
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.
