Ever since AICPA SOP 97-2, PS managers within software companies have been forced to arm wrestle with both internal accounting staff and external auditors regarding revenue recognition policies for service engagements that are bundled with software and support offerings. Now, hardware companies that are bolting in value added software products are being forced to navigate 97-2 as well.
Earlier this year, TPSA published a Services Insight paper that documents how several product companies are approaching the following three areas related to vendor specific objective evidence (VSOE) for service offerings:
When does SOP 97-2 have to applied? For some hardware companies that sell hardware and software, simply using fair value may work fine.
- On what types of service offerings should PS establish VSOE?
- How do TPSA members determine whether product functionality is dependent on PS activities being completed?
The discussion among service finance and operations experts on these three questions led to the creation of a workflow diagram and text that documents how some product companies have answered these three critical questions. The workflow diagram is below.
Why is this work so critical to the PS industry? Because, to date, no one has been motivated to publish how product companies are actually interpreting and applying VSOE requirements. Auditors that instruct product companies on how to interpret 97-2 are not motivated to publish their specific guidance. Revenue recognition consulting firms are clearly not motivated to remove uncertainty in this area. However, product companies themselves are highly motivated to understand how their peers are interpreting VSOE requirements. In the context of our industry association, we are able to take that motivation and create a document all member companies can leverage.
The reason I am blogging on this topic today is because of a conversation I had with a member late last week. The member had been struggling with an oppressive interpretation of revenue recognition requirements that was negatively impacting service revenue recognition. In fact, company sales representatives were not selling company services with a product sale to avoid the revenue recognition issues created by the company policy. However, the member was able to reference this Services Insight to demonstrate the current policy was not in line with other product companies. The auditor took the input and adjusted their recommendations for revenue recognition. This experience warms my heart. It proves, once again, that companies can work together to create meaningful content for this industry that benefits all TPS providers.