SBN » Topics » Revenue Recognition

These excerpts taken from the SBN 10-K filed Dec 10, 2008.
Revenue Recognition
 
We generate our revenue from licenses of our software products, from maintenance or support for that software, from providing services related to that software and, in some instances, from related hardware. We recognize revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, Securities and Exchange Commission Staff Accounting Bulletin 104, Revenue Recognition and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.
 
Software license revenue is recognized under SOP 97-2 when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) collectibility is probable and supported and the arrangement does not require services that are essential to the functionality of the software.
 
  •  Persuasive Evidence of an Arrangement Exists.  We determine that persuasive evidence of an arrangement exists with respect to a customer under (i) a license agreement that is signed by both the customer and by us, or (ii) a purchase order, quote or binding letter-of-intent received from and signed by the customer, in which case the customer has previously executed a license agreement with us. We do not offer product return rights to end users or resellers.
 
  •  Delivery has Occurred.  Our software may be either physically or electronically delivered to the customer. We determine that delivery has occurred upon shipment of the software pursuant to the billing terms of the arrangement or when the software is made available to the customer through electronic delivery. Customer acceptance generally occurs at delivery.
 
  •  The Fee is Fixed or Determinable.  If, at the outset of the customer arrangement, we determine that the arrangement fee is not fixed or determinable, revenue is typically recognized when the arrangement fee becomes due and payable.
 
  •  Collectibility is Probable.  We determine whether collectibility is probable on a case-by-case basis. We generate a high percentage of our license revenue from our current customer base, for which there is a history of successful collection. We assess the probability of collection from new customers based upon the number of years the customer has been in business and a credit review process, which evaluates the customer’s financial position and ultimately their ability to pay. If we are unable to determine from the outset of an arrangement that collectibility is probable based upon our review process, revenue is recognized as payments are received.
 
With regard to software arrangements involving multiple elements, we allocate revenue to each element based on the relative fair value of each element. Our determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). Our assessment of VSOE for each element is based on the price charged when the same element is sold separately. We have analyzed all of the elements included in our multiple-element arrangements and have determined that we have sufficient VSOE to allocate revenue to the consulting services and maintenance components of our license arrangements. Generally, we sell our consulting services separately and have established VSOE on this basis. VSOE for maintenance is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance is deferred and recognized ratably over the maintenance period, which is typically one year.
 
Services revenue consists of fees from consulting services, maintenance and subscription (distribution service provider) services. Consulting services include needs assessment, software integration, security analysis, application development and training. We bill consulting services fees either on a time and materials basis or on a fixed-price schedule. In most cases, our consulting services are not essential to the functionality of our software. In general, our software products are fully functional upon delivery and do not require any


48


Table of Contents

 
SoftBrands, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
significant modification or alteration for customer use. Customers purchase our consulting services to facilitate the adoption of our technology and may dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service personnel or organizations to provide these consulting services. Software products are billed separately from consulting, maintenance and subscription services. We generally recognize revenue from consulting services as services are performed. Our customers typically purchase maintenance annually, in advance, and receive unspecified product upgrades, Web-based technical support and telephone hot-line support.
 
Where the services we provide are essential to the functionality of the software or another element of a contract, such as where we conduct custom software development as part of a software license sale, we recognize all related revenue based on the percentage-of-completion method in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. This is normally measured based on the number of total hours of services performed compared to an estimate of the total hours to be incurred. Significant judgments and estimates related to the use of percentage-of-completion accounting include whether the services being provided are essential to the functionality of the software or another element of a contract and whether we have the ability to estimate the total service hours to be performed. As the projects for our customers become more complex and require more software development and customization, we expect that revenue from some of these contracts will be recognized in this manner and will primarily have the effect of recognizing software license revenue, and related expenses, on these larger projects over a longer period of time instead of up front at the time of delivery of the software, if all other software revenue recognition requirements have been met.
 
Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue.
 
We follow very specific and detailed guidelines, as discussed above, in determining our revenues; however, certain judgments and estimates are made and used to determine revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized for any period, if different conditions were to prevail. For example, in determining whether collection is probable, we assess our customers’ ability and intent to pay. Our actual experience with respect to collections could differ from our initial assessment if, for instance, unforeseen declines in the overall economy occur and negatively impact our customers’ financial condition.
 
Revenue
Recognition



 



We generate our revenue from licenses of our software products,
from maintenance or support for that software, from providing
services related to that software and, in some instances, from
related hardware. We recognize revenue in accordance with
Statement of Position (“SOP”)
97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions
, Securities and Exchange Commission Staff
Accounting Bulletin 104, Revenue Recognition and
SOP 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
.


 



Software license revenue is recognized under
SOP 97-2
when (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred, (iii) the fee is fixed or
determinable and (iv) collectibility is probable and
supported and the arrangement does not require services that are
essential to the functionality of the software.


 














































  • 

Persuasive Evidence of an Arrangement
Exists.
  We determine that persuasive evidence of
an arrangement exists with respect to a customer under
(i) a license agreement that is signed by both the customer
and by us, or (ii) a purchase order, quote or binding
letter-of-intent received from and signed by the customer, in
which case the customer has previously executed a license
agreement with us. We do not offer product return rights to end
users or resellers.
 
  • 

Delivery has Occurred.  Our software may be
either physically or electronically delivered to the customer.
We determine that delivery has occurred upon shipment of the
software pursuant to the billing terms of the arrangement or
when the software is made available to the customer through
electronic delivery. Customer acceptance generally occurs at
delivery.
 
  • 

The Fee is Fixed or Determinable.  If, at the
outset of the customer arrangement, we determine that the
arrangement fee is not fixed or determinable, revenue is
typically recognized when the arrangement fee becomes due and
payable.
 
  • 

Collectibility is Probable.  We determine
whether collectibility is probable on a
case-by-case
basis. We generate a high percentage of our license revenue from
our current customer base, for which there is a history of
successful collection. We assess the probability of collection
from new customers based upon the number of years the customer
has been in business and a credit review process, which
evaluates the customer’s financial position and ultimately
their ability to pay. If we are unable to determine from the
outset of an arrangement that collectibility is probable based
upon our review process, revenue is recognized as payments are
received.


 



With regard to software arrangements involving multiple
elements, we allocate revenue to each element based on the
relative fair value of each element. Our determination of fair
value of each element in multiple-element arrangements is based
on vendor-specific objective evidence (“VSOE”). Our
assessment of VSOE for each element is based on the price
charged when the same element is sold separately. We have
analyzed all of the elements included in our multiple-element
arrangements and have determined that we have sufficient VSOE to
allocate revenue to the consulting services and maintenance
components of our license arrangements. Generally, we sell our
consulting services separately and have established VSOE on this
basis. VSOE for maintenance is determined based upon the
customer’s annual renewal rates for these elements.
Accordingly, assuming all other revenue recognition criteria are
met, revenue from perpetual licenses is recognized upon delivery
using the residual method in accordance with
SOP 98-9,
and revenue from maintenance is deferred and recognized ratably
over the maintenance period, which is typically one year.


 



Services revenue consists of fees from consulting services,
maintenance and subscription (distribution service provider)
services. Consulting services include needs assessment, software
integration, security analysis, application development and
training. We bill consulting services fees either on a time and
materials basis or on a fixed-price schedule. In most cases, our
consulting services are not essential to the functionality of
our software. In general, our software products are fully
functional upon delivery and do not require any





48





Table of Contents





 




SoftBrands,
Inc.



 



Notes to Consolidated Financial
Statements — (Continued)


 



significant modification or alteration for customer use.
Customers purchase our consulting services to facilitate the
adoption of our technology and may dedicate personnel to
participate in the services being performed, but they may also
decide to use their own resources or appoint other professional
service personnel or organizations to provide these consulting
services. Software products are billed separately from
consulting, maintenance and subscription services. We generally
recognize revenue from consulting services as services are
performed. Our customers typically purchase maintenance
annually, in advance, and receive unspecified product upgrades,
Web-based technical support and telephone hot-line support.


 



Where the services we provide are essential to the functionality
of the software or another element of a contract, such as where
we conduct custom software development as part of a software
license sale, we recognize all related revenue based on the
percentage-of-completion method in accordance with
SOP 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
. This is normally measured based
on the number of total hours of services performed compared to
an estimate of the total hours to be incurred. Significant
judgments and estimates related to the use of
percentage-of-completion accounting include whether the services
being provided are essential to the functionality of the
software or another element of a contract and whether we have
the ability to estimate the total service hours to be performed.
As the projects for our customers become more complex and
require more software development and customization, we expect
that revenue from some of these contracts will be recognized in
this manner and will primarily have the effect of recognizing
software license revenue, and related expenses, on these larger
projects over a longer period of time instead of up front at the
time of delivery of the software, if all other software revenue
recognition requirements have been met.


 



Customer advances and billed amounts due from customers in
excess of revenue recognized are recorded as deferred revenue.


 



We follow very specific and detailed guidelines, as discussed
above, in determining our revenues; however, certain judgments
and estimates are made and used to determine revenue recognized
in any accounting period. Material differences may result in the
amount and timing of revenue recognized for any period, if
different conditions were to prevail. For example, in
determining whether collection is probable, we assess our
customers’ ability and intent to pay. Our actual experience
with respect to collections could differ from our initial
assessment if, for instance, unforeseen declines in the overall
economy occur and negatively impact our customers’
financial condition.


 




This excerpt taken from the SBN 10-K filed Dec 14, 2007.
Revenue Recognition
 
We generate our revenue from licenses of our software products, from maintenance or support for that software, from providing services related to that software and, in some instances, from related hardware. We recognize revenue in accordance with Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, Securities and Exchange Commission Staff Accounting Bulletin 104, Revenue Recognition and SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.
 
Software license revenue is recognized under SOP 97-2 when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) collectibility is probable and supported and the arrangement does not require services that are essential to the functionality of the software.
 
  •  Persuasive Evidence of an Arrangement Exists.  We determine that persuasive evidence of an arrangement exists with respect to a customer under (i) a license agreement that is signed by both the customer and by us, or (ii) a purchase order, quote or binding letter-of-intent received from and signed by the customer, in which case the customer has previously executed a license agreement with us. We do not offer product return rights to end users or resellers.
 
  •  Delivery has Occurred.  Our software may be either physically or electronically delivered to the customer. We determine that delivery has occurred upon shipment of the software pursuant to the billing terms of the arrangement or when the software is made available to the customer through electronic delivery. Customer acceptance generally occurs at delivery.
 
  •  The Fee is Fixed or Determinable.  If, at the outset of the customer arrangement, we determine that the arrangement fee is not fixed or determinable, revenue is typically recognized when the arrangement fee becomes due and payable.
 
  •  Collectibility is Probable.  We determine whether collectibility is probable on a case-by-case basis. We generate a high percentage of our license revenue from our current customer base, for which there is a history of successful collection. We assess the probability of collection from new customers based upon the number of years the customer has been in business and a credit review process, which evaluates the customer’s financial position and ultimately their ability to pay. If we are unable to determine from the outset of an arrangement that collectibility is probable based upon our review process, revenue is recognized as payments are received.
 
With regard to software arrangements involving multiple elements, we allocate revenue to each element based on the relative fair value of each element. Our determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). Our assessment of VSOE for each element is based on the price charged when the same element is sold separately. We have analyzed all of the elements included in our multiple-element arrangements and have determined that we have sufficient VSOE to allocate revenue to the consulting services and maintenance components of our license arrangements.


52


Table of Contents

 
SoftBrands, Inc.
 
Notes to Consolidated Financial Statements — (Continued)
 
Generally, we sell our consulting services separately and have established VSOE on this basis. VSOE for maintenance is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance is recognized ratably over the respective term, which is typically one year.
 
Services revenue consists of fees from consulting services, maintenance and subscription (distribution service provider) services. Consulting services include needs assessment, software integration, security analysis, application development and training. We bill consulting services fees either on a time and materials basis or on a fixed-price schedule. In most cases, our consulting services are not essential to the functionality of our software. In general, our software products are fully functional upon delivery and do not require any significant modification or alteration for customer use. Customers purchase our consulting services to facilitate the adoption of our technology and may dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service personnel or organizations to provide these consulting services. Software products are billed separately from consulting, maintenance and subscription services. We generally recognize revenue from consulting services as services are performed. Our customers typically purchase maintenance annually and receive unspecified product upgrades, Web-based technical support and telephone hot-line support. Our customers typically pay for maintenance services in advance, and we defer the revenue that results and recognize it ratably over the maintenance period, which is typically one year.
 
Where the services we provide are essential to the functionality of the software or another element of a contract, such as where we conduct custom software development as part of a software license sale, we recognize all related revenue based on the percentage-of-completion method. This is normally measured based on the number of total hours of services performed compared to an estimate of the total hours to be incurred. Significant judgments and estimates related to the use of percentage-of-completion accounting include whether the services being provided are essential to the functionality of the software or another element of a contract and whether we have the ability to estimate the total service hours to be performed.
 
Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue.
 
We follow very specific and detailed guidelines, as discussed above, in determining our revenues; however, certain judgments and estimates are made and used to determine revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized for any period, if different conditions were to prevail. For example, in determining whether collection is probable, we assess our customers’ ability and intent to pay. Our actual experience with respect to collections could differ from our initial assessment if, for instance, unforeseen declines in the overall economy occur and negatively impact our customers’ financial condition.
 
This excerpt taken from the SBN 8-K filed Dec 13, 2006.

Revenue Recognition

The Company earns revenue from sales of hardware, software and professional services and from arrangements involving multiple elements of each of the above. Revenue for multiple element arrangements are recorded by allocating revenue to the various elements based on their respective fair values as evidenced by vendor specific objective evidence. The fair value in multi-element arrangements is determined based upon the price charged when sold separately. Revenue is not recognized until persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is probable. Sales of network and computer equipment are recorded when title and risk of loss transfers. Software revenues are recorded when application software programs are shipped to end users, resellers and distributors, provided the Company is not required to provide services essential to the functionality of the software or significantly modify, customize or produce the software. Professional services fees for software development, training and installation are recognized as the services are provided. Maintenance revenues are recorded evenly over the related contract period.

This excerpt taken from the SBN 10-K filed Dec 20, 2005.
Revenue Recognition.  Revenue under multiple-element arrangements, which may include several software products, services, third-party software, hardware and customer support sold together, is allocated to each element based upon the residual method in accordance with SOP 98-9.  Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized as discussed

 

52



 

below.  The Company has established sufficient vendor-specific objective evidence of fair value for customer support and other professional services based upon the price charged when these elements are sold separately.  Accordingly, software license fees are recognized as revenue upon delivery under the residual method in arrangements in which the software is licensed with other elements, provided the undelivered elements of the arrangements are not essential to the functionality of the delivered software and all other criteria for revenue recognition are met.

 

The Company recognizes software license fees upon execution of the signed contract, shipment of the software to the customer, determination that the software license fees are fixed or determinable, determination that there are no uncertainties surrounding product acceptance, and determination that the collection of the software license fees is probable.  In software arrangements in which the Company does not have vendor-specific objective evidence of fair value for undelivered elements, revenue is deferred until fair value is determined or all elements have been delivered.  Customer support revenues are recognized ratably over the term of the arrangement, generally one year, on a straight-line basis.  If substantive acceptance clauses are included in customer contracts, the Company recognizes the related software license revenue upon formal acceptance by the customer.  The other professional services elements of a software arrangement are typically accounted for separately as the services are performed.  The Company records revenue upon the resale of third-party software licenses and hardware at the gross amount of the sale and records the associated cost as cost of revenues.  The Company does not have minimum sales commitments under any of these arrangements.

 

In those instances where the services are essential to the functionality of any other element of the arrangement, contract accounting is applied, generally using the percentage-of-completion method.  The timing of revenue recognition on such contracts is based on the number of labor hours incurred for the contract compared to total estimated labor hours for the contract.  These estimates are reviewed periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change.  Estimated losses on such contracts are recorded in the period in which the losses become known.  In circumstances where the Company is unable to reasonably estimate total labor hours for the contract, the completed-contract method of accounting is utilized.  All costs and related revenues are reported as deferred items on the balance sheet until completion of the contract.

 

Deferred revenue consists of license, maintenance and service revenue.  At September 30, 2005 and 2004, the amounts included in deferred revenue for contract accounting were not significant.

 

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