Death of 97-2

This post is dedicated to every Services manager that has cursed the following words “According to 97-2….”

Over the years, TSIA has published several papers on the topic of revenue recognition when services are associated with the sale of a technology product.  Ever since FASB published 97-2 (hyperlinl), Product companies have been forced to engage in unnatural behaviors related to bundling services with the sale of a product. Well, that craziness is finally winding out of the technology industry. There are new revenue recognition guidelines that are being rolled out in the technology industry. I have blogged about these pending changes before:

Call to Action for Service Organizations: BIG Changes in Revenue Recognition Rules

These new guidelines are now becoming real for both hardware and software companies. You no longer have to simply take my word for it. These new guidelines are influencing the largest SaaS company in tech: salesforce.com. Below are notes from salesforce’s most recent 10-K. From my vantage point, these notes clearly spell out the death of a terrible practice titled “ratable PS.” Read the notes and tell me if you don’t agree.

In determining whether professional services can be accounted for separately from subscription and support revenues, we consider a number of factors, which are described in “Critical Accounting Policies and Estimates – Revenue Recognition” below. Prior to February 1, 2011, the deliverables in multiple-deliverable arrangements were accounted for separately if the delivered items had standalone value and there was objective and reliable evidence of fair value for the undelivered items. If the deliverables in a multiple-deliverable arrangement could not be accounted for separately, the total arrangement fee was recognized ratably as a single unit of accounting over the contracted term of the subscription agreement. A significant portion of our multiple-deliverable arrangements were accounted for as a single unit of accounting because we did not have objective and reliable evidence of fair value for certain of our deliverables. Additionally, in these situations, we deferred the direct costs of a related professional service arrangement and amortized those costs over the same period as the professional services revenue was recognized.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13, “Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”) which amended the previous multiple-deliverable arrangements accounting guidance. Pursuant to the new guidance, objective and reliable evidence of fair value of the deliverables to be delivered is no longer required in order to account for deliverables in a multiple-deliverable arrangement separately. Instead, arrangement consideration is allocated to deliverables based on their relative selling price. In the first quarter of fiscal 2012, we adopted this new accounting guidance on a prospective basis. We applied the new accounting guidance to those multiple-deliverable arrangements entered into or materially modified on or after February 1, 2011 which is the beginning of our fiscal year.

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