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Jim Pitrat - FASB Issues New Rules on Revenue: 10/13/09 : 05:23 p.m.

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The FASB’s Emerging Issues Task Force released two Audit Standards Updates (ASUs) on Revenue recognition that will significantly impact they way many companies account for multiple element arrangements.  In particular, technology and software companies will have to assess how they are evaluating their sales agreements. 

The two pieces of guidance are:

 

  • ASU No. No. 2009-13 Allocating Revenue in Arrangements Containing Multiple Deliverables

 

  • ASU No. 2009-14 Revenue Arrangements Containing Software Elements, and

 

The two standards are intended to compliment each other, and are designed to address certain problems with the 00-21 as it relates to multiple element arrangements, and ever increasing issues related to the sale of software in conjunction with or imbedded in hardware or other tangible products.

The major changes in the guidance related to Multiple Element Arrangements is:

 

  • In order for an element of a revenue arrangement to qualify as a separate unit of accounting, the guidance removes the requirement that of objectively determinable fair value and establishes a new threshold of Estimated Selling Price.

 

  • The use of the so-called “residual method” of accounting for delivered and undelivered elements is no longer acceptable.

  

The major changes related to software accounting are:

Scoping the following out of software accounting rules:

  1. Non-software components of tangible products,
  2. Software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components operate together to deliver the product's essential functionality, and
  3. Undelivered elements relating to software that is deemed essential to a tangible product's functionality.

 

It also establishes guidance for:

 

  • Determining when software and non-software components operate together to provide essential functionality, and

 

  • The process that must be undertaksideration between software deliverables and non software deliverables that are scoped out of software accounting.

 

The new guidance together represent a significant change in the way multiple element arrangements will be accounted for in years beginning on or after June 15, 2010 (early adoption is permitted).  Accountants and executives facing the challenges associated with multiple deliverable arrangements would be wise to start familiarizing themselves with the guidance very soon.