Hello I am wondering how to account for this transaction. There are multiple deliverables (tangible product, Post Contract Support, Initial Customization). - Selling a tangible good, with built in wireless chip and software embedded. - Product requires each item (approximately 200 of them) to be customized initially with an input of a few fields of data. - The product will also require the items to be maintained lightly through telephone support if any modifications are requested. - Contract with the customer invoices them for the inventory/product, and a one-time upfront customization fee. Contract term is 2 years. - The devices will not work without customization, and the support is basically integral to their function. - No VSOE exists for any of the deliverables other than tangible product. My Questions are as follows: - Because the service is integral to the product, ASC 605-25 seems to indicate they should NOT be separate units of
Multiple Element Accounting Considerations
Answers
Romin:
Start by looking at the scope exceptions in 985-605-15-4. Based on your description, the product probably falls under "e. Software components of tangible products that are sold, licensed, or leased with tangible products when the software components and nonsoftware components of the tangible product function together to deliver the tangible product's essential functionality." In plain English, this exception was added in 2009 to clarify that items such as cellphones are not within the scope of ASC 985.
Once you know what guidance you are following (ASC 985 or ASC 605-25), it's easier to address the remaining questions.
1. It appears that the initial customization is essential to the Functionality of the wireless chip. Thus, the chip does not have “stand-alone value to the customer.” Thus, the wireless chip and the initial customization are one unit of accounting. (See 985-605-25-12 and 605-25-25-5).
2. Can the Post Contract Support be performed by a 3rd party. If so, it has “stand-alone value to the customer” and is a separate deliverable. If not, then the wireless chip, initial customization, and the Post Contract Support are one unit of accounting and the total revenue should be recognized ratably over the Post Contract Support period (605-25-25-6 and 985-605-10).
3. The embedded software works with the wireless chip to deliver the wireless chip’s essential functionality. Thus, it should not be accounted for under the software guidance (See 985-605-15-4)
I agree with Mr. Sosnow's assessment except as follows.
The Post Contract Support represents a future obligation that is undelivered at the time when the revenue from the tangible product/customization is recognizable. Although you say PCS is integral to the product function, you also state that it is invoked if modifications are required. Consequently, the PCS is not integral to the function of the product as delivered.
To be treated as a separate unit if accounting, it is not necessary that the PCS can be performed by a third party. It is only necessary that the customer could sell the delivered items on a standalone basis (ASC 605-25-25-5), or that you could provide the PCS as a separate service and that you can establish a valid selling price (VSOE) for that service as well as the delivered items (ASC 605-25-30-2 and 605-25-30-6A). The amount of the contract price that is allocated to each unit of accounting (the customized product and the PCS) will be based on the relationship of the two separate selling prices.
If the customization process occurs over a long-term, you may also want to consider the guidance at 605-35.
If my little pea brain is serving me at all well, this situation was specifically covered by changes in the accounting rules implemented in 08 and 09, under 09-3 and 08-1. I don't seem to see this acknowledged above, but ** beware ** I am not an
Under 09-3, when software and non-software elements function together, then the relevant accounting standard is 08-1. Under 08-1,
As I say, commentary is welcome.
Development of VSOE as a means of establishing the revenue to be recognized from each element in a transaction having multiple units of accounting is regulated by ASU 2009-13, which is incorporated into the ASC at 605-25-30 as noted in my previous response.