On September 21, 2009, the Financial Accounting Standards Board (FASB) ratified a consensus regarding two Emerging Issues Task Force (EITF) issues that affect revenue recognition within, among others, the software industry, and will likely result in higher reported earnings in the short term. These changes also bring U.S. Generally Accepted Accounting Principles (GAAP) closer to international standards. Both EITFs are available for early adoption.

EITF Issue no. 08-1, Revenue Recognition with Multiple Deliverables
This issue, which applies to multiple-deliverable revenue arrangements that are currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic 605-25, provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and how the consideration should be allocated. It also requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price.

In addition to eliminating the use of the residual method, this guidance requires that entities allocate revenue using the relative-selling-price method, and significantly expands the disclosure requirements for multiple-deliverable revenue arrangements.

EITF Issue No. 09-3, Certain Revenue Arrangements that
Include Software Elements
This issue focuses on determining which arrangements are or are not within the scope of the software revenue guidance in ASC Topic 985. It removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a product’s essential functionality. It also provides guidance on determining whether the software deliverables in an arrangement including a tangible product are within the scope of the software revenue guidance.

Until now, companies that make devices that blend hardware and software, such as the iPod and iPhone, were required to spread the related revenue over the life of the device. These types of devices were not envisioned when the original rules were written. The new changes will allow the manufacturer to "unbundle" and record hardware revenue up front.

Both EITFs are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. An entity can also choose to adopt the EITFs retrospectively. Although early application is allowed, entities must adopt both EITFs in the same period using the same transition method. In addition, in the initial year of application, companies are required to make qualitative and quantitative disclosures about the impacts of the changes.

For more information, contact Alison Dunnebecke, National Technology Practice Area Leader at adunnebecke@heincpa.com or 303.298.9600.

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