No, I’m not talking about TPA 5100.38 – Subsequent Event Related to VSOE.  That just says you can do your VSOE analysis after the balance sheet date, as long as you support it with data that existed on or before the balance sheet date.  What I’m talking about below is what to do when you initially have to recognize an entire arrangement (product, license, everything) ratably because of lack of VSOE of fair value for either PCS or other services.

If you don’t have VSOE of fair value, paragraph 12 of SOP 97-2 actually tells you to defer all revenue “until the earlier of the point at which (a) such sufficient vendor-specific objective evidence does exist or (b) all elements of the arrangement have been delivered”, but then goes on to provide at least two exceptions:

• “if the only undelivered element is PCS, the entire fee should be recognized ratably”, and
• “if the only undelivered element is services… (for example, training or installation), the entire fee should be recognized ratably”.

So here’s the rule:  if no VSOE of fair value, then ratable treatment over the service period.  I get it.

But what if you establish VSOE of fair value in a subsequent reporting period?  Maybe, with another quarter or two of data, your population of standalone transactions at long last now demonstrates the magic 80/15 bell shape (see discussion of other ways to get VSOE here).

Certainly, we don’t go back and restate prior periods now that we have established VSOE of fair value in a current period.  But what do we do with the millions stuck in the huge deferred revenue waterfall slowly tricking into revenue over the service period?  Do we let that waterfall keep trickling, or do we now reassess those arrangements by applying VSOE of fair value to the remaining undelivered services and recognize the residual in the current period.

Answer:  there isn’t one (which means you get to make a policy choice).  When I chat with some knowledgeable Big 4 colleagues on this topic, about half say the newly established VSOE of fair value should only be applied to new arrangements, while the other half say that you should take the residual revenue in the current period.  One firm actually has come out and explained this issue in their commentary, while others seem not to object to either approach.  In any case, before you go materially altering revenue, ensure your audit team is on board with your choice as these are the sort of judgment calls that evolve.

Personally, I can see it both ways.  Paragraph 12 does indeed say defer revenue until you get VSOE, but doing such a “catch-up” of revenue in a period where nothing else fundamentally happened with the transaction seems like “mark-to-market” accounting for rev rec.

On the other hand, perhaps the exceptions listed in paragraph 12 are supposed to apply for the “life” of the arrangement without our being able to revisit the accounting determined at the outset.

Your call.  Just be consistent.

Responses are currently closed, but you can trackback from your own site.