Strategic accounting: the value of vendor specific objective evidence.

AuthorBennett, Thomas

The technology sector is often defined by its Fast-paced environment, market opportunities and entrepreneurial personalities. Creative minds and strategic investors combine Forces to develop cutting-edge products to meet the demands of developing markets. It's a risky environment because the costs of development are often incurred long before any revenues are generated. The path to success can be scattered with unanticipated land mines; the growth of even the most promising technology companies have been stalled due to financial restatements and other accounting woes. For those companies that successfully commercialize and bring their product to market they can be rewarded with high margins.

Accounting and financial reporting for early stage technology companies is often riddled with complex (and sometimes obscure transactions that require a significant amount of' judgment and estimation. These transactions can include equity compensation, complex financing arrangements and derivatives, among others. While all of these matters contribute to a accounting function and independent audit process), one area of U.S. GAAP has a more meaningful impact on a company as it grows: software revenue recognition. Amidst all the complexities of U.S. GAAP, revenue recognition for software developers and licensors continues to challenge CPAs from a technical standpoint but, more importantly, can significantly impact the strategic direction of the company and potentially even the value of the business.

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Revenue Recognition for Software

FASB Accounting Standards Codification 985-605 Statement of Position No. 97-2 prior to the codification) governs revenue recognition for software developers and licensors. This literature is not new, but the implications of it continue to impact business strategy. Here's how it works: software contracts typically contain multiple deliverables or elements. The most common elements include a software license, maintenance or post-contract support PCS), training services and hardware. This may vary significant.

Hardware elements, for example, are generally fairly simple from a revenue recognition standpoint because the company's obligations are fulfilled upon delivery.

However. PCS is delivered over a period of time often several years depending on the contract terms. Because of this, it calls into question the value of the related software license. Many companies have tried to game the system by allocating substantially all of the contract value to the software license, which they recognize up front, and very...

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