This question was asked by an attendee at a recent Proformative Rev Rec
What kind of disruptions have the new revenue recognition rules caused within adopting companies?
Answers
This is an interesting question – although not one that has an impact on the adoption of these standards. As
You could make a case that sales and marketing creativity – driven by the need to win business – helped drive the need for these standards. The multi-element revenue rules, both the SOP 97.2 based and the EITF 08-01 based, set the method for revenue determination and recognition regardless of how you sold your products. This was done to keep accounting for revenue to what is realizable and earned regardless of how it was sold – as well as to try and preserver some comparability of revenue between organizations - again regardless of how they price and sell.
Now you can continue this cycle and say that sometimes the accounting revenue needs under SOP 97.2 had an impact on the company allowed sales and pricing models – accounting requirements designed to support VSOE revenue determination that may or may not have been helpful in the market capture initiatives. There is the potential that this could be more flexible under the new EITF 08-01 proportional allocation method. At the same time there can be more financial complexity given the required new rules adoption – so what was simpler or cleanly managed before becomes more complex.
It has always been helpful to build some understanding of company specific revenue requirements into your legal agreements. Once you have a determination it should be factored into your contracts. It is not uncommon for companies to have revenue recognition experts included in their contract negotiations to take care of the company needs in that area, if your go-to-market model is based on direct contractually defined terms. The need for this does not change based on the new rules, although the specifics for the implementation may change.
This can be a big topic – and I suppose is beyond a simple answer. In closing I would state there are other considerations need for the transition related to business systems (data collection and processing) as well as potential impacts on the customer acquisition and support.
In certain circumstances where all elements of a pure software arrangement have VSOE except for license and the total VSOE of all elements exceeds the value of the total arrangement? Assuming there is no VSOE for delivered element, how do you allocate the fees to delivered and undelivered elements for revenue recognition? Can someone help on this?
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A good question to validate with your corporate experts - auditors or otherwise.
You need to establish are you subject to SOP 97.2 or EITF 08-01. The biggest change between the two compliance models - for MEA fair value revenue allocation - is the move from the residual method to the relative value method. The residual method used a priority of 'undelivered items' allocation first followed by a weighted average allocation to the delivered items. EITF 08-01 moves all revenue items to the same level - with the MEA fair value allocation occurring across all revenue elements as a weighted average.
From your note - given your mention of undelivered items - I'm guessing you are complying with SOP 97.2. In that scenario you first fully allocate the undelivered items. If there is not enough value to fully fund the undelivered items you would use a weighted average allocation to distribute the available funding to those items. The delivered items would receive an allocation of the residual - which in your scenario would be zero.
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