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Multiple Element Accounting Considerations

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 accounting. 1. Initial customization is invoiced upfront at a standard billing rate which could pass for VSOE. If so, can this element be recognized upon completion? 2. Because the other two elements are under one unit of accounting, are they to be recognized proportionally over the service term, as in contract accounting? 3. Does simply having software in the product indicate I will have to use ASC 985, Software Rev Rec, or does ASC 605-25 Multiple Elements apply in this situation? Any and all insight would be appreciated.


Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

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.

Konrad Sosnow
Title: Revenue Recognition Guru
Company: Konrad M. Sosnow & Associates
(Revenue Recognition Guru, Konrad M. Sosnow & Associates) |

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)

Phil Bolles
Title: Chief Financial Officer
Company: Global Commercial Strategies Group
(Chief Financial Officer, Global Commercial Strategies Group) |

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.

David Dobrin
Title: President
Company: B2B Analysts, Inc.
(President, B2B Analysts, Inc.) |

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 accountant, merely a close observer of these issues, so the highly qualified people above are probably right, and whatever I have to say is probably beside the point. If so, and if any of the highly qualified people would care to explain, I'd appreciate it.

Under 09-3, when software and non-software elements function together, then the relevant accounting standard is 08-1. Under 08-1, management can substitute best estimated selling price when VSOE is not available. And the basic principle that is apparently operating under this change is that you recognize revenue when value is delivered. Put those two together, and the answer to 1 seems to be pretty clear: initial customization can be recognized when delivered at the billing rate (if no VSOE is available). Ditto with 2. If they function together, but value is delivered at different points, then they don't have to be recognized ratably, and in fact shouldn't be. As for 3, I am taking this to be a multiple-element situation.

As I say, commentary is welcome.

Phil Bolles
Title: Chief Financial Officer
Company: Global Commercial Strategies Group
(Chief Financial Officer, Global Commercial Strategies Group) |

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.


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