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From Deloitte & Touche Review--
July 8, 1996

The AICPA recently issued a proposed Statement of Position (SOP) on accounting for computer software revenue. If adopted, the proposed guidance would supersede SOP 91-1, Software Revenue Recognition.

Applicable to Many Companies. The proposed SOP would be applicable to all entities (not just those in the software industry) that earn revenue from licensing, selling, leasing, or otherwise marketing computer software. It would affect a broad base of companies and arrangements, including those with resellers.

Fundamental Recognition Principles. The fundamental revenue recognition principles of SOP 91-1 would remain, for the most part, unchanged. That is, the proposed SOP does not change the basic premise that rights transferred in software licensing arrangements are substantially the same as those transferred in sales of other products, and the legal distinctions between a license and a sale should not cause differences in revenue recognition. Delivery to the customer remains a key requirement for recognition in software licensing arrangements.

Timing of Revenue Recognition. The timing of revenue recognition under the proposed SOP would no longer depend on whether a vendor's obligation to provide additional services is significant or insignificant--a distinction in SOP 91-1 that many found confusing. The proposed SOP requires that each element of an arrangement meet the criteria for recognition of revenue.

"Bundled"Arrangements. The proposed SOP also addresses the measurement and recognition of revenue from bundled" arrangements that include multiple products, upgrades, platform transfer rights, services, and/or support. For fixed-fee arrangements that bundle deliverables, revenue would be recognized as each element is delivered, provided contract accounting does not apply, and

* There is persuasive evidence of an arrangement (e.g., signed contract, purchase order, or online authorization),

* The fee is fixed or determinable, and can be allocated to each element based on the price charged when the element is sold separately (if not yet being sold, based on vendor-specific objective evidence of fair value),

* Future elements to be delivered are not essential to the functionality of the delivered element, and

* Collectibility is probable, and the fee allocated to the delivered element is not subject to forfeiture, refund, or other concession if the other elements of the arrangement are not delivered.

"We expect that the proposed guidance would have a tremendous impact on the technology industry, particularly companies that bundle products and services and have no basis for allocating the license fee to the separate elements," said Mark Evans, national managing director of Deloitte & Touche LLP's High Technology Group. "Companies may have to change their business practices as well as their accounting policies as a result of this proposed SOP."

A Deloitte & Touche booklet, Software Revenue Recognition­Upgrading SOP 91-1, analyzes key provisions of the proposed SOP. To obtain a copy of the booklet, please contact your local Deloitte & Touche office or the firm's high technology practice on the Internet [hightech@dttus.com]. The text of the booklet is also available on the world wide web [http://zmw.dttus.com]. *

From Deloitte & Touche Review July 8, 1996

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