25-1 Software arrangements range from those that provide a license for a single software product to those that, in addition to the
delivery of software or a software system, require significant production, modification, or customization of software.
Software Requiring Significant Production, Modification, or Customization
25-2 If an arrangement to deliver software or a software system, either alone or together with other products or services, requires
significant production, modification, or customization of software, the entire arrangement shall be accounted for in conformity with Subtopic 605-35, using the relevant guidance in paragraphs 985-605-25-88 through 25-107 on applying contract accounting to certain arrangements involving software.
Software Not Requiring Significant Production, Modification, or Customization
25-3 If the arrangement does not require significant production, modification, or customization of software, revenue shall be
recognized when all of the following criteria are met:
a. Persuasive evidence of an arrangement exists (see paragraphs 985-605-25-15 through 25-17). b. Delivery has occurred (see paragraphs 985-605-25-18 through 25-29).
c. The vendor’s fee is fixed or determinable (see paragraphs 985-605-25-30 through 25-40).
d. Collectibility is probable (see paragraphs 985-605-25-13 through 25-14 and 985-605-25-30 through 25-40).
25-4 The term probable is used in this Subtopic with the same definition as used in Topic 450. Multiple-Element Arrangements
25-5 Software arrangements may provide licenses for multiple software deliverables (for example, software products, upgrades
or enhancements, postcontract customer support, or services), which are termed multiple elements. A number of the elements may be described in the arrangement as being deliverable only on a when-and-if-available basis. When-and-if-available deliverables shall be considered in determining whether an arrangement includes multiple elements. Accordingly, the requirements of this Subtopic with respect to arrangements that consist of multiple elements shall be applied to all additional products and services specified in the arrangement, including those described as being deliverable only on a when-and-if-available basis.
25-6 If an arrangement includes multiple elements, the fee shall be allocated to the various elements based on vendor-specific
objective evidence of fair value, regardless of any separate prices stated in the contract for each element. Vendor-specific objective evidence of fair value is limited to the following:
a. The price charged when the same element is sold separately
b. For an element not yet being sold separately, the price established by management having the relevant authority; it must be probable that the price, once established, will not change before the separate introduction of the element into the marketplace
25-7 The amount allocated to undelivered elements is not subject to later adjustment. (This does not apply to changes in the
estimated percentage of customers not expected to exercise an upgrade right. See paragraph 985-605-25-45.) However, if it becomes probable that the amount allocated to an undelivered element will result in a loss on that element of the arrangement, the loss shall be recognized pursuant to Topic 450. When a vendor’s pricing is based on multiple factors such as the number of products and the number of users, the amount allocated to the same element when sold separately shall consider all the factors of the vendor’s pricing structure.
ASC 985-605 (continued)
25-8 If a discount is offered in a multiple-element arrangement, a proportionate amount of that discount shall be applied to each
element included in the arrangement based on each element’s fair value without regard to the discount. However, as discussed in paragraph 985-605-25-45, no portion of the discount shall be allocated to any upgrade rights. Moreover, to the extent that a discount exists, the residual method described in paragraphs 985-605-25-10 through 25-11 attributes that discount entirely to the delivered elements.
25-9 Except as provided in the following paragraph, if sufficient vendor-specific objective evidence does not exist for the allocation
of revenue to the various elements of the arrangement, all revenue from the arrangement shall be deferred until the earlier of the point at which:
a. Such sufficient vendor-specific objective evidence does exist. b. All elements of the arrangement have been delivered.
25-10 The following are exceptions to the guidance in the preceding paragraph:
a. If the only undelivered element is postcontract customer support, the entire fee shall be recognized ratably (see paragraphs 985-605-25-66 through 25-75).
b. If the only undelivered element is services that do not involve significant production, modification, or customization of software (for example, training or installation), the entire fee shall be recognized over the period during which the services are expected to be performed (see paragraphs 985-605-25-76 through 25-85).
c. If the arrangement is in substance a subscription, the entire fee shall be recognized ratably (see paragraphs 985-605- 25-58 through 25-59).
d. If the fee is based on the number of copies, the arrangement shall be accounted for in conformity with paragraphs 985-605-25-52 through 25-57.
e. There may be instances in which there is vendor-specific objective evidence of the fair values of all undelivered elements in an arrangement but vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement. In such instances, if both of the conditions in the following paragraph are met, the fee shall be recognized using the residual method as follows:
1. The total fair value of the undelivered elements, as indicated by vendor-specific objective evidence, is deferred. 2. The difference between the total arrangement fee and the amount deferred for the undelivered elements is
recognized as revenue related to the delivered elements.
f. If an arrangement includes deliverables that are within the scope of this Subtopic (software deliverables) and deliverables that are not within the scope of this Subtopic (nonsoftware deliverables), a vendor shall allocate arrangement consideration to the nonsoftware deliverables, and to the software deliverables as a group, in accordance with paragraph 605-25-15-3A. The nonsoftware deliverables may include software deliverables that are considered essential to the functionality of a tangible product. If the arrangement includes more than one software deliverable, the portion of the arrangement consideration allocated to the software deliverables as a group in accordance with the guidance in paragraph 605-25-15-3A would be further subject to the separation and allocation guidance of this Subtopic. If a tangible product contains software that is not essential to the product’s functionality, that nonessential software and any other deliverables within the arrangement (other than the nonsoftware components of the tangible product) that relate to that nonessential software are within the scope of this Subtopic. If an undelivered element relates to a deliverable within the scope of this Subtopic and a deliverable excluded from the scope of this Subtopic, the undelivered element shall be bifurcated into a software deliverable and a nonsoftware deliverable. The software deliverable is within the scope of this Subtopic and the nonsoftware deliverable is not within the scope of this Subtopic.
25-11 The residual method described in (e) in the preceding paragraph shall be applied only if both of the following conditions are
met:
a. All other applicable revenue recognition criteria in this Subtopic are met. b. The fair value of all of the undelivered elements is less than the arrangement fee.
25-12 The portion of the fee allocated to an element shall be recognized as revenue when the criteria in paragraph 985-605-25-3
are met with respect to the element. In applying those criteria, the delivery of an element is considered not to have occurred if there are undelivered elements that are essential to the functionality of the delivered element, because the customer would not have the full use of the delivered element.
ASC 985-605 (continued)
25-13 No portion of the fee (including amounts otherwise allocated to delivered elements) meets the criterion of collectibility if the
portion of the fee allocable to delivered elements is subject to forfeiture, refund, or other concession if any of the undelivered elements are not delivered. For the revenue related to an arrangement to be considered not subject to forfeiture, refund, or other concession, management must intend not to provide refunds or concessions that are not required under the provisions of the arrangement. All available evidence shall be considered to determine whether the evidence persuasively indicates that the revenue is not subject to forfeiture, refund, or other concession. Although no single item of evidence may be persuasive, all of the following additional items shall be considered:
a. Acknowledgment in the arrangement of products not currently available or not to be delivered currently b. Separate prices stipulated in the arrangement for each deliverable element
c. Default and damage provisions as defined in the arrangement
d. Enforceable payment obligations and due dates for the delivered elements that are not dependent on the delivery of the future deliverable elements, coupled with the intent of the vendor to enforce rights of payment
e. Installation and use of the delivered software
f. Support services, such as telephone support, related to the delivered software being provided currently by the vendor.
25-14 Regardless of the guidance in the preceding paragraph, the vendor’s historical pattern of making refunds or other
concessions that were not required under the original provisions (contractual or other) of other arrangements shall be considered more persuasive than terms included in the arrangement that indicate that no concessions are required.